TY  - JOUR
AU  - Driscoll,John C.
AU  - Ito,Harumi
TI  - Sticky Prices, Coordination and Collusion
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7165
PY  - 1999
Y2  - June 1999
UR  - http://www.nber.org/papers/w7165
L1  - http://www.nber.org/papers/w7165.pdf
N1  - Author contact info:
John C. Driscoll
Federal Reserve Board
20th and Constitution Ave., NW
Washington, DC 20551
Tel: (202)452-2628
Fax: (202)452-2301
E-Mail: John.C.Driscoll@frb.gov

Harumi Ito
Department of Economics
Brown University, Box B
Providence, RI  02912
Tel: 401/863-2887
Fax: 401/863-1970
E-Mail: no email available
AB  - New Keynesian models of price setting under monopolistic competition involve two kinds of inefficiency: the price level is too high because firms ignore an aggregate demand externality, and when there are costs of changing prices, price stickiness may be an equilibrium response to changes in nominal money even when all agents would be better off if all adjusted prices.  This paper models the consequences of allowing firms to coordinate, enforcing the coordination by punishing deviators; this is equivalent to modeling firms as an implicit cartel playing a punishment game.  We show that coordination can partially or fully eliminate the first kind of inefficiency, depending on the magnitude of the punishment, but cannot always remove the second. The response of prices to a monetary shock will depend on the magnitude of the punishment, and may be asymmetric.  Implications for the welfare cost of fluctuations also differ from the standard monopolistic competition case.
ER  -