Research note: an analytical perspective on market decisions and asymmetric cost behavior

Abstract

Asymmetric cost behavior has attracted the interest of many (empirical) researchers in the last years. Prior research determines several sources of this behavior such as resource adjustment costs, uncertainties and related beliefs, agency problems, and fixed costs. Empirical studies measure firms’ cost behavior using total firm costs and sales. In imperfect markets, firms react to changing market conditions by adapting output prices and quantities so that both total firm costs and sales are affected. However, changing output prices only directly affects sales and not costs. Based on an economic model, we identify market decisions (output quantity and pricing decisions) as an additional source of measured asymmetric cost behavior.