Understanding Positive Asymmetric Pricing with a Log-Concave Demand Function and Constant Marginal Costs

Abstract

The stylized fact of prices increasing more strongly than they decrease in response to identically-sized cost changes, have been confirmed in many empirical studies. However, most of them claim that standard pricing theory cannot account for this phenomenon. Using constant marginal costs and allowing the demand function to be log-concave, this paper shows that the positive asymmetric pricing phenomenon in terms of magnitude can be explained by two of the classic standard economic competition models, Stackelberg with homogenous goods and Bertrand with non-homogenous goods. Furthermore, based on simulations, this paper compares the magnitudes of asymmetry generated in the standard economic competition models. Results show that with a log-concave demand function and constant marginal costs, the magnitude of the positive asymmetric pricing is positively related to the market power. Therefore, the monopoly model is the most asymmetric one, followed by Cournot, Stackelberg and Bertrand.