TY  - JOUR
AU  - Bils,Mark
AU  - Chang,Yongsung
TI  - Understanding How Price Responds to Costs and Production
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7311
PY  - 1999
Y2  - August 1999
UR  - http://www.nber.org/papers/w7311
L1  - http://www.nber.org/papers/w7311.pdf
N1  - Author contact info:
Mark Bils
Department of Economics
University of Rochester
Rochester, NY 14627
Tel: 585/275-0488
Fax: 585/256-2309
E-Mail: bils@troi.cc.rochester.edu

Yongsung Chang
Department of Economics
University of Rochester
Rochester, NY 14627
Tel: 1-585-275-1871
Fax: 1-585-256-2309
E-Mail: ychang14@mail.rochester.edu
AB  - The importance of sticky prices in business cycle fluctuations has been debated for many years. But we argue, based on a large empirical literature from the 1950's and 60's, that it is necessary to distinguish the response of price to an increase in factor prices from its response to an increase in marginal cost generated by an expansion in production.  Consistent with that earlier literature, we find for 450 U.S. manufacturing industries that prices do respond more to increases in costs driven by changes in factor prices than to increases in marginal cost precipitated by expansions in output. We explore two models that can potentially explain these findings. Both break the link between price and marginal cost, thereby generating what one might naively interpret as average-cost pricing. The first is driven by firms pricing to limit entry. The second is driven by firms pricing to limit non-price competition within their market.
ER  -