Corporate price dynamics during and after the COVID‐19 pandemic: Insights from a partial equilibrium model

Abstract

AbstractThe COVID‐19 pandemic created an unprecedented demand and supply shock to the world economies. To understand its impact on corporate prices, we define a partial equilibrium model where non‐financial corporations operating in three sectors (suppliers, end‐producers and service providers) optimize their production under monopolistic competition and are subject to demand and supply shocks of different intensities. Our model confirms that when the demand shock dominates, prices tend to decrease. We then introduce data from the COVID‐19 pandemic in the European Union into our model and find that prices are expected to fall in the most acute phase of the pandemic, when lockdowns and similar health measures decrease demand, and to increase later as a result of tensions in the supply of intermediate goods and of the persistence of the supply shock. Inventories could play a decisive role in avoiding price increases in the moderate phase of the pandemic. In the post‐pandemic period, higher prices may continue for a time until the shock to suppliers vanishes. These are relevant insights on the macroeconomic impact of worldwide pandemics, also considering the current macroeconomic environment.