Fairness And Short Run Price Adjustment In Posted Offer Markets

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Fairness And Short Run Price Adjustment In Posted Offer Markets

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Praveen Kujal
Vernon L. Smith ()

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Abstract

Questionnaire studies show that perceptions of fairness cause people to resist price increases following abrupt changes in conditions with no cost justification. We examine this hypothesis in posted-offer markets extending previous work. Consistent with the hypothesis, in the profit disclosure (fairness) treatment prices are initially below those in the cost and the no disclosure treatments. Over time prices converge in all treatments to the competitive surplus maximizing equilibrium. Fairness is thus interpreted as being a result of expectations that are not sustainable. Expectations adapt as the market converges to the predicted competitive equilibrium.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we036024.

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Date of creation: Nov 2003
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Handle: RePEc:cte:werepe:we036024

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This paper has been announced in the following NEP Reports:

NEP-ALL-2003-11-16 (All new papers)
NEP-CBE-2003-11-16 (Cognitive & Behavioural Economics)
NEP-EXP-2003-11-16 (Experimental Economics)

References listed on IDEAS
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Ketcham, Jon & Smith, Vernon L & Williams, Arlington W, 1984. "A Comparison of Posted-Offer and Double-Auction Pricing Institutions," Review of Economic Studies, Blackwell Publishing, vol. 51(4), pages 595-614, October. [Downloadable!] (restricted)
Franciosi, Robert, et al, 1995. "Fairness: Effect on Temporary and Equilibrium Prices in Posted-Offer Markets," Economic Journal, Royal Economic Society, vol. 105(431), pages 938-50, July. [Downloadable!] (restricted)
Binmore, Ken, et al, 1993. "Focal Points and Bargaining," International Journal of Game Theory, Springer, vol. 22(4), pages 381-409.

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Healy, Paul J., 2004. "Fairness, or just gambling on it? An experimental analysis of the gift exchange game," Working Papers 1183, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]

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