Asymmetric Price Adjustment

Too funny!! The friends I usually go to dinner with Friday nights have noticed this phenomenon with respect to gas prices (there is a station's price board in view out the window) for the past couple years. No economists or academics in the group though ;-).

-Brad

For Discussion. What is the significance of asymmetric price adjustment for macroeconomics?

If prices cannot adjust upwards easily then a stimulus either by monetary expansion or by Keynesian fiscal spending would result in increased output rather than increasing inflation.

On the negative side, though, getting rid of inflation is more difficult because output will want to drop before prices do.

Boonton may be correct, but one also has to consider initial conditions, and interactions. Supposing iid shocks hit all industries; then over time, even if prices haven't changed, underlying conditions have ... and industries are all closer, or farther, from some threshold beyong which they will go ahead and adjust prices upwards. So it's not entirely obvious that you get a big output change and a small price change across the board. I conjecture that for bigger shocks, the smaller the apparent asymmetry.
Furthermore, you only get this kinked setup for some kinds of price changes, i.e. when you are the only one adjusting. If conditions change markedly such that all firms will be forced to adjust, then - since everyone is changing their prices - you face the ordinary elasticity when you increase your price. Thus, the issue is coordination of price changes.