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Price rigidity in customer markets

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  • Renner, Elke
  • Tyran, Jean-Robert

Abstract

Customer markets are characterized by long-term relations between buyers and sellers. Long-term relations evolve if buyers trust sellers to provide high quality and if sellers are trustworthy. However, changes in the terms of this implicit contract may antagonize customers and disrupt the relation. We experimentally show that mutually beneficial long-term relations frequently prevail in markets for experience goods, and that price rigidity after a temporary cost shock is much more pronounced if price increases cannot be justified by cost increases. Hence, long-term relations on customer markets mitigate market failure of the “lemons” type, but are prone to price stickiness.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 55 (2004)
Issue (Month): 4 (December)
Pages: 575-593

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Handle: RePEc:eee:jeborg:v:55:y:2004:i:4:p:575-593

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  1. Cason, T.N. & Gangadharan, L., 1999. "Environmental Labeling and Incomplete Consumer Information in Laboratory Markets," Department of Economics - Working Papers Series 708, The University of Melbourne.
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  4. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  5. Harvey James, 2002. "On the Reliability of Trusting," Microeconomics 0202002, EconWPA.
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  7. Mark A. Wynne, 1995. "Sticky prices: what is the evidence?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 1-12.
  8. Brown, Martin & Falk, Armin & Fehr, Ernst, 2002. "Contractual Incompleteness and the Nature of Market Interactions," CEPR Discussion Papers 3272, C.E.P.R. Discussion Papers.
  9. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
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  11. Julio J. Rotemberg, 2002. "Customer Anger at Price Increases, Time Variation in the Frequency of Price Changes and Monetary Policy," NBER Working Papers 9320, National Bureau of Economic Research, Inc.
  12. Cason Timothy N. & Friedman Daniel, 2002. "A Laboratory Study of Customer Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 2(1), pages 1-45, February.
  13. Engle-Warnick, Jim & Slonim, Robert L., 2004. "The evolution of strategies in a repeated trust game," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 553-573, December.
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Cited by:
  1. Andrew T. Young & Daniel Levy, 2005. "Explicit Evidence on an Implicit Contract," Emory Economics 0519, Department of Economics, Emory University (Atlanta).
  2. Huck, Steffen & Tyran, Jean-Robert, 2007. "Reciprocity, social ties, and competition in markets for experience goods," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(2), pages 191-203, April.
  3. Emmanuel Saez & Pascal Michaillat, 2013. "A Theory of Aggregate Supply and Aggregate Demand as Functions of Market Tightness with Prices as Parameters," 2013 Meeting Papers 1216, Society for Economic Dynamics.
  4. Jean-Robert Tyran & Arno Riedl, 2003. "Tax Liability Side Equivalence in Gift-Exchange Labor Markets," University of St. Gallen Department of Economics working paper series 2003 2003-15, Department of Economics, University of St. Gallen.
  5. M. Alper Cenesiz, 2007. "A New Cost Channel of Monetary Policy," Money Macro and Finance (MMF) Research Group Conference 2006 68, Money Macro and Finance Research Group.
  6. Andrew T. Young & Alexander K. Blue, 2007. "Retail prices during a change in monetary regimes: evidence from Sears, Roebuck catalogs, 1938-1951," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 763-775.
  7. Nicolas Vincent, 2012. "Price Stickiness in Customer Markets with Reference Prices," Cahiers de recherche 1230, CIRPEE.
  8. Nakamura, Emi & Steinsson, Jón, 2011. "Price setting in forward-looking customer markets," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 220-233.
  9. Kleshchelski, Isaac & Vincent, Nicolas, 2009. "Market share and price rigidity," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 344-352, April.

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