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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. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 615-41, August.
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  3. Kachelmeier, Steven J. & Limberg, Stephen T. & Schadewald, Michael S., 1991. "Fairness in markets: A laboratory investigation," Journal of Economic Psychology, Elsevier, Elsevier, vol. 12(3), pages 447-464, September.
  4. 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.
  5. Cason, T.N. & Gangadharan, L., 1999. "Environmental Labeling and Incomplete Consumer Information in Laboratory Markets," Department of Economics - Working Papers Series, The University of Melbourne 708, The University of Melbourne.
  6. Engle-Warnick, Jim & Slonim, Robert L., 2004. "The evolution of strategies in a repeated trust game," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 55(4), pages 553-573, December.
  7. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
  8. Harvey James, 2002. "On the Reliability of Trusting," Microeconomics, EconWPA 0202002, EconWPA.
  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, American Economic Association, vol. 76(4), pages 728-41, September.
  10. 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.
  11. Franciosi, Robert, et al, 1995. "Fairness: Effect on Temporary and Equilibrium Prices in Posted-Offer Markets," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 105(431), pages 938-50, July.
  12. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
  13. Apel, Mikael & Friberg, Richard & Hallsten, Kerstin, 2001. "Micro Foundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms," Working Paper Series 128, Sveriges Riksbank (Central Bank of Sweden).
  14. Mark A. Wynne, 1995. "Sticky prices: what is the evidence?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, Federal Reserve Bank of Dallas, issue Q I, pages 1-12.
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Citations

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Cited by:
  1. Arno Riedl & Jean-Robert Tyran, 2003. "Tax Liability Side Equivalence in Gift-Exchange Labor Markets," Tinbergen Institute Discussion Papers 03-065/1, Tinbergen Institute.
  2. Andrew T. Young & Daniel Levy, 2005. "Explicit Evidence on an Implicit Contract," Working Papers 2005-04, Bar-Ilan University, Department of Economics.
  3. Nicolas Vincent, 2012. "Price Stickiness in Customer Markets with Reference Prices," Cahiers de recherche, CIRPEE 1230, CIRPEE.
  4. 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, Elsevier, vol. 36(2), pages 191-203, April.
  5. Kleshchelski, Isaac & Vincent, Nicolas, 2009. "Market share and price rigidity," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(3), pages 344-352, April.
  6. Nakamura, Emi & Steinsson, Jón, 2011. "Price setting in forward-looking customer markets," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(3), pages 220-233.
  7. 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, Society for Economic Dynamics 1216, Society for Economic Dynamics.
  8. 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.
  9. M. Alper Cenesiz, 2007. "A New Cost Channel of Monetary Policy," Money Macro and Finance (MMF) Research Group Conference 2006, Money Macro and Finance Research Group 68, Money Macro and Finance Research Group.

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