Dr. Jurjen Kamphorst publishes article on 'Fixed costs matter even when the costs are sunk'

Jurjen Kamphorst

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:

  1. future profits increase in current sales
  2. firms are liquidity-constrained.

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