(S,s) Pricing: Does the Heterogeneity Wipe Out the Asymmetry on Micro Level?

Zakaria Babutsidze


In this paper I present a model of asymmetric pricing. Firms here follow the (S,s) pricing rule with different lengths of tails. I use numerical simulations with four-state shocks to detect the link between the present asymmetry in pricing on the micro level and asymmetry in aggregate output movements. This paper investigates whether the asymmetry on firm level can result in asymmetry on the macro level and what is the role of heterogeneity of agents in the process. It looks at two kinds of asymmetries on the aggregate level: (i) asymmetric output responses to positive and negative monetary shocks and (ii) asymmetric responses to shocks during different phases of business cycle. The basic conclusion is that to some extent the first type of asymmetry can be attributed to the asymmetry of adjustment bands and that heterogeneity softens the effect, but the second type of asymmetry is the result of (S,s) pricing behaviour of firms, thus of heterogeneity itself.

Keywords: (S,s) pricing, Asymmetry, Four-state shocks, Heterogeneity. JEL codes: E31, E37.

UNU-MERIT Working Papers ISSN 1871-9872

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