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Search with learning: understanding asymmetric price adjustments

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  • Huanxing Yang
  • Lixin Ye

Abstract

In many retail markets, prices rise faster than they fall. We develop a model of search with learning to explain this phenomenon of asymmetric price adjustments. By extending our static game analysis to the dynamic setting, we demonstrate that asymmetric price adjustments arise naturally. When a positive cost shock occurs, all the searchers immediately learn the true state; the search intensity, and hence the prices, fully adjust in the next period. When a negative cost shock occurs, it takes longer for nonsearchers to learn the true state, and the search intensity increases gradually, leading to slow falling of prices. Copyright (c) 2008, RAND.

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Bibliographic Info

Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 39 (2008)
Issue (Month): 2 ()
Pages: 547-564

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Handle: RePEc:bla:randje:v:39:y:2008:i:2:p:547-564

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Cited by:
  1. Cabral, Luís & Fishman, Arthur, 2012. "Business as usual: A consumer search theory of sticky prices and asymmetric price adjustment," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 30(4), pages 371-376.
  2. Obradovits, Martin, 2014. "Austrian-style gasoline price regulation: How it may backfire," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 32(C), pages 33-45.
  3. Dmitry Lubensky, 2011. "A Model of Recommended Retail Prices," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2011-06, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  4. Maarten Janssen & Alexei Parakhonyak & Anastasia Parakhonyak, 2014. "Non-reservation price equilibria and Consumer search," HSE Working papers, National Research University Higher School of Economics WP BRP 51/EC/2014, National Research University Higher School of Economics.
  5. Adam Reiff & Peter Karadi, 2011. "Large Shocks in Menu Cost Models," 2011 Meeting Papers 884, Society for Economic Dynamics.
  6. Mokinski, Frieder & Wölfing, Nikolas, 2013. "The effect of regulatory scrutiny asymmetric cost pass-through in power wholesale and its end," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 13-055, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  7. Escobari, Diego, 2012. "Asymmetric Price Adjustments in Airlines," MPRA Paper 42115, University Library of Munich, Germany.
  8. Marc Hofstetter & Jorge Tovar, 2010. "Common Knowledge Reference Price and Asymmetric Price Adjustments," Review of Industrial Organization, Springer, Springer, vol. 37(2), pages 141-159, September.
  9. Castilla, Carolina & Haab, Timothy C., 2010. "Asymmetric Search and Loss Aversion: Choice Experiment on Consumer Willingness to Search in the Gasoline Retail Market," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado, Agricultural and Applied Economics Association 61672, Agricultural and Applied Economics Association.
  10. Riemer P. Faber, 2009. "Asymmetric Price Responses of Gasoline Stations: Evidence for Heterogeneity of Retailers," Tinbergen Institute Discussion Papers 09-106/1, Tinbergen Institute.
  11. Dmitry Lubensky, 2013. "A Model of Recommended Retail Prices," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2013-14, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  12. Marc Hofstetter & Jorge Tovar, 2007. "Asymmetric Price Adjustments Under Ever-Increasing Costs. Evidence from the Retail Gasoline Market in Colombia," DOCUMENTOS CEDE, UNIVERSIDAD DE LOS ANDES-CEDE 005146, UNIVERSIDAD DE LOS ANDES-CEDE.
  13. Riemer P. Faber, 2009. "Asymmetric Price Responses of Gasoline Stations: Evidence for Heterogeneity of Retailers," Tinbergen Institute Discussion Papers 09-106/1, Tinbergen Institute.

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