Price Setting

The prices of some products fluctuate dramatically, while others remain more constant. What accounts for these extreme differences? Renowned economist Truman F. Bewley investigates and elucidates this puzzling problem. Its crux, he argues, is that differentiated product prices are usually stable, whereas the prices of undifferentiated products – for which buyers can easily find comparable substitutes – are often volatile. Although product differentiation gives producers market power, this power