(DP 1984-08) Price Decisions and Equilibrium

Abstract

This paper explores the model of the imperfectly competitive firm, facing demand uncertainly, that sets a price on its product so as to maximize the probability of obtaining satisfactory profits. It is a consequence that the price is higher with higher demand or higher costs. With all firms as price setters there is a general price equilibrium where prices are stationary. This entails an equilibrium average level of employment which is likely to be less than full employment. The model accommodates the phenomenon of inflation and increasing unemployment.