Firm Adjustment to Abrupt Changes in Price Expectations

In this paper we investigate the output adjustment behavior for a firm subject to abrupt changes in price expectation. We first characterize the adjustment process for the single firm. This leads to the description of output adjustment across firms. In particular, we show that radical expected price changes tend to create homogeneity of output rates across firms. The implication of this phenomenon to the formation of market structure and some policy ramifications are then explored.