Are "Rockets and Feathers" Caused by Search or Informational Frictions
AbstractPrices usually adjust much faster when costs increase than when costs decrease. The mechanism driving this "Rockets-and-Feathers" phenomenon is not well understood despite of ample empirical evidence for its existence. We use simple experimental markets with and without consumer search and either privately or publicly observed cost shocks to study this puzzle. In contrast to the theoretical predictions, we observe price dispersion and asymmetric price adjustment in all four settings. We attribute the pricing behavior to bounded rationality and its interaction with adaptive expectations. We conclude that neither search costs nor private information are indispensable for prices to adjust asymmetrically.
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Bibliographic InfoPaper provided by Max Planck Institute for Tax Law and Public Finance in its series Working Papers with number are_rockets_and_feathers_caused_by_search_or_informational_frictions.
Length: 37 pages
Date of creation: Sep 2011
Date of revision:
Asymmetric Price Adjustment; Price Dispersion; Adaptive Search; Bounded Rationality;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-25 (All new papers)
- NEP-COM-2012-01-25 (Industrial Competition)
- NEP-CTA-2012-01-25 (Contract Theory & Applications)
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