Minimax Adjustment Price Setting and Price Rigidities: Preissetzung nach dem Minimax-Anpassungsprinzip und Preisstarrheiten 1. Introduction 2. The Minimax Adjustment Principle 3. The Optimization Problem of a Monopolistic Firm 4. Optimal Price Adjustment 5. The Case of Fuzzy Information 6. Concluding Remarks References

• Published in: Jahrbücher für Nationalökonomie und Statistik 2004-02, Vol.224 (1/2), p.37
• Main Authors: Hauenschild, Nils, Stahlecker, Peter
• Format: Article
• Language: English
• Subjects: Costs; Economic theory; Fuzzy sets; Macroeconomics; Mathematical models; Prices; Studies
• ISSN: 0021-4027; 2366-049X

This study considers a model of a price setting monopolistic firm that has to decide on a price adjustment in light of some new information about the uncertain demand for its product. It is assumed that the firm applies the so-called minimax adjustment principle for this purpose. This optimality principle is based on the notion that human decision makers tend to be reluctant to change their behaviour and prefer to take the current price as a benchmark rather than to compute optimal new prices all the time. We show that the current price is maintained as long as it lies in some set that is derived from the firm's degree of uncertainty and its degree of conservatism as regards changing behaviour. Otherwise, the price is adjusted but kept as close as possible to the current price. Hence, the model provides an explanation for the existence of price rigidities which is not based on any technical adjustment or menu costs but simply on how human decision makers may deal with uncertainty.