Dynamic Stability of Post-Keynesian Pricing
The B.E. Journal of Theoretical Economics 17(2), online 24 February 2017Author(s): Kemp-Benedict, E.
Research Area(s): Sustainable FuturesDescription:
Conventional economic theory assumes a Walrasian pricing mechanism that is known to pose theoretical difficulties. Less well-known is that conventional price theory conflicts with empirical studies of price-setting in industrial firms. Post-Keynesian theory, which assumes mark-up pricing on normal costs and infrequent price changes, is consistent with observation.
This paper shows that post-Keynesian pricing, unlike conventional pricing, features stable dynamics. The analysis focus on the short run, because post-Keynesian theory posits complex and historically contingent long-term price dynamics. Specifically, the paper shows that under very general conditions, prices converge to a unique equilibrium price vector.