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The reset premium: Option value under asymmetric price commitment

We show that a one-sided price-adjustment rule, with free price cuts but a fixed daily reset for price increases, raises the reset price even under risk neutrality, mean-zero wholesale cost shocks, and perfect consumer information. The mechanism is option-theoretic: a higher reset price preserves pass-through in adverse cost states, while favora…

Economics
By Harry J. Paarsch and Karl Schmedders
in Economic Letters
September 2026, vol. 268, 113146, https://doi.org/10.1016/j.econlet.2026.113146
The reset premium: Option value under asymmetric price commitment
By Harry J. Paarsch and Karl Schmedders
in Economic Letters September 2026, vol. 268, 113146, https://doi.org/10.1016/j.econlet.2026.113146
Summary
We show that a one-sided price-adjustment rule, with free price cuts but a fixed daily reset for price increases, raises the reset price even under risk neutrality, mean-zero wholesale cost shocks, and perfect consumer information. The mechanism is option-theoretic: a higher reset price preserves pass-through in adverse cost states, while favora…
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