How firms set prices is key to understanding markets. Standard economics dictates that the fixed costs of a firm should not affect its prices. Nonetheless, it is common practice for firms to raise their prices after a fixed costs increase. We show that firms are correct in doing so if two ubiquitous conditions apply: (i) future profits increase in current sales and (ii) firms are liquidity-constrained.

, , ,
Economics Letters
Erasmus University Rotterdam

Kamphorst, J.J.A, Mendys-Kamphorst, E, & Westbrock, B. (2020). Fixed costs matter even when the costs are sunk. Economics Letters, 195. doi:10.1016/j.econlet.2020.109428