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Edgeworth price cycle


An Edgeworth price cycle is an asymmetric price variation that has the following characteristics:

Because of (1), smaller competitors have a greater incentive to initiate cutting. Larger competitors will generally be the initiator of restorations. The cycle is asymmetric because restorations happen nearly simultaneously, but undercutting is generally slower.

Edgeworth cycles are distinguished from both sticky pricing and cost-based pricing. Sticky prices are typically found in markets with less aggressive price competition, so there are fewer or no cycles. Purely cost-based pricing occurs when retailers mark up from wholesale costs, so costs follow wholesale variations closely.

Competitive gasoline markets with a high degree of independent or small retailers typically demonstrate Edgeworth cycling, while markets dominated by majors (vertically integrated firms) will tend toward sticky pricing. Because the cycles tend to occur frequently, weekly average prices found in government reports will generally mask the cycling.


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