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.

Additional Metadata
Keywords Liquidity constraints, Pricing, Sunk costs, Switching costs
JEL Monopoly (jel D42), Production, Pricing, and Market Structure; Size Distribution of Firms (jel L11)
Persistent URL dx.doi.org/10.1016/j.econlet.2020.109428, hdl.handle.net/1765/129476
Journal Economics Letters
Citation
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