infonet-economy

Variations in cost and demand do not have symmetrical impact on the optimal price of the imperfectly competitive firm. This asymmetry is not so important as long as information regarding both cost and demand is sufficient. However, it becomes crucially important in case of incomplete information. Usually firms have more complete or ‘harder’ information on cost than on demand. This difference in information status on the cost and on the demand side can explain both cost-based pricing and slow price adjustment to demand in an optimizing framework with Bayesian learning about changed demand conditions.