Inventories and Price Inflexibility

Abstract

A firm maximizing expected discounted profits, taking account of the actions of its competitors, choosing price and output before (stochastic) demand is known, and holding inventories or unfilled orders to accommodate discrepancies between output and demand, is shown to respond to a change in demand by changing its output whether the demand change is transitory or permanent, but by changing the price it charges only if the demand change is permanent. This proposition is shown to be consistent with German data. The data are qualitative. The empirical analysis uses the multivariate conditional logit model; the empirical results are summarized by gamma coefficients.