Non-Market Clearing Prices in a Dynamic Oligopoly with Incomplete Information

Abstract

The major criticisms of the work on disequilibrium macroeconomics are that (1) one is unable to explain why firms set non-market clearing prices and given that they have done so (2) do the prices adjust through time to equilibrate the market and if so, how. In this paper, I provide a simple model which illustrates that the following intuition may provide a partial answer to both criticisms. The basic idea is that firms may learn about the market in which they compete by observing their own sales. If their own sales provide additional information and if that information is valuable, then the firm may use non-market clearing prices to acquire this information. This possibility may arise because the firm may be unable to infer whether demand was just sufficient to buy all that were for sale at the price he was charging or whether the firm could have raised its price and still sold every unit it had produced. If the demand states are correlated, then this information has value as the firm can make more informed choices in the future. The model provided shows that this intuition is supportable as an potential, partial explanation for non-market clearning pricing and provides a (potentially) over simple explanation of the adjustment process to equilibrating prices in the future.