Long Run Price Dynamics in Oligopoly

It is shown that a fixed cost of nominal price changes enhances the ability of firms to collude in an ologopolistic market for a homogeneous good. Nevertheless, harsh price competition with firms making no profit remains a possible outcome. The analysis focuses on stable symmetric steady states that can be sustained if firms use strategies that depend only on the previous period price. The collusive outcome under inflation is characterized and the resulting price dynamics is compared to that of an equilibrium in which firms earn zero profit.