How firms set prices is key to understanding markets. Standard economics dictates that the fixed costs of a firm should not affect its prices. Nevertheless, it is common practice for firms to raise their prices after a fixed costs increase.
This paper shows that firms are correct in doing so if two ubiquitous conditions apply:
- future profits increase in current sales
- firms are liquidity-constrained.
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Publication: https://doi.org/10.1016/j.econlet.2020.109428
