Real price rigidity can result from several factors. A thick market has many buyers and sellers, so search costs are lower. Thick markets can be expected to occur more often during booms, and macroeconomics theories and policies froyen pdf free download thin during downturns.
If this pattern causes marginal costs to increase during recessions, thick markets can lead to real rigidities. Customer markets” can also create real rigidities. In customer markets, firms take advantage of their market power and refuse to lower prices because they do not want to give customers an incentive to shop elsewhere and search for prices that are even lower. They would rather offer the customer a consistent price and have the customer consistently shop at their store.
Also, customers will likely not notice a price cut as much as a price increase, giving the store less of an incentive to cut prices. The complexity of the “input-output table” can also lead to rigidity. Firms face large information requirements in determining how to optimize their pricing. They not only have to know the demand for their own goods and their own costs, they have to know the pricing factors for all their competitors and other firms in the vast market of inputs and outputs. Capital market imperfections lead to more real rigidities. This can lead to firms seeking more external finance during downturns, which drives up the firm’s cost and creates another rigidity.
Imperfect information can also create rigidity in the consumer market. Consumers may see price as an indicator for quality. Firms may be reluctant to cut their prices if they fear that consumers might start to the product as “cheap”. New Keynesian economists have sought to explain persistently high unemployment in industrialized economies.
New Keynesians explain part of this excess supply in the labor market with real wage rigidities that hold wages above market clearing levels. New Keynesian economics is especially associated with the latter two. Implicit contract theory attributes stable real wages to implied agreements between employers and workers. Firms serve not just as consumers of labor, but also as wage insurers.