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Nominal Price Shocks in Monopolistically Competitive Markets: An Experimental Analysis

Author

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  • Douglas D. Davis

    (Department of Economics, VCU School of Business)

  • Korenok Oleg

    (Department of Economics, VCU School of Business)

Abstract

We report a market experiment that examines the capacity of price and information frictions to explain real responses to nominal price shocks. As predicted by the standard dynamic adjustment models, we find that both price and information frictions impede the response to a nominal shock. We also find, however, that the observed adjustment delays far exceed predicted levels. Results of a pair of subsequent treatments indicate that a combination of announcing the shock privately to all sellers (rather than publicly) and a failure of many sellers to best respond to their expectations explains the observed adjustment inertia.

Suggested Citation

  • Douglas D. Davis & Korenok Oleg, 2010. "Nominal Price Shocks in Monopolistically Competitive Markets: An Experimental Analysis," Working Papers 1003, VCU School of Business, Department of Economics, revised Jun 2011.
    • Handle: RePEc:vcu:wpaper:1003
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    References listed on IDEAS

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    Cited by:

    1. Giamattei, Marcus, 2015. "Cold Turkey vs. Gradualism - Evidence on Disinflation Strategies from a Laboratory Experiment," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-67-15, University of Passau, Faculty of Business and Economics.
    2. Kephart, Curtis & Munro, David, 2023. "Market concentration and the responsiveness of prices and mark-ups," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 104(C).
    3. Camille Cornand & Frank Heinemann, 2014. "Experiments on Monetary Policy and Central Banking," Research in Experimental Economics, in: Experiments in Macroeconomics, volume 17, pages 167-227, Emerald Group Publishing Limited.
    4. Camille Cornand & Frank Heinemann, 2015. "Macro-expérimentation autour des fonctions des banques centrales," Revue française d'économie, Presses de Sciences-Po, vol. 0(2), pages 3-47.
    5. Bulutay, Muhammed & Cornand, Camille & Zylbersztejn, Adam, 2022. "Learning to deal with repeated shocks under strategic complementarity: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1318-1343.
    6. Fenig, Guidon & Mileva, Mariya & Petersen, Luba, 2018. "Deflating asset price bubbles with leverage constraints and monetary policy," Journal of Economic Behavior & Organization, Elsevier, vol. 155(C), pages 1-27.
    7. Lambsdorff, Johann Graf & Schubert, Manuel & Giamattei, Marcus, 2013. "On the role of heuristics—Experimental evidence on inflation dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1213-1229.
    8. Yves Ortiz & Martin schüle, 2011. "Limited Rationality and Strategic Interaction: A Probabilistic Multi-Agent Model," Working Papers 11.08, Swiss National Bank, Study Center Gerzensee.
    9. Tiziana Assenza & Te Bao & Cars Hommes & Domenico Massaro, 2014. "Experiments on Expectations in Macroeconomics and Finance," Research in Experimental Economics, in: Experiments in Macroeconomics, volume 17, pages 11-70, Emerald Group Publishing Limited.
    10. Jiang, Janet Hua & Puzzello, Daniela & Zhang, Cathy, 2023. "Inflation, Output, and Welfare in the Laboratory," European Economic Review, Elsevier, vol. 152(C).
    11. Marcus Giamattei, 2022. "Can Cold Turkey Reduce Inflation Inertia? Evidence on Disinflation and Level‐k Thinking from a Laboratory Experiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(8), pages 2477-2517, December.
    12. Orland, Andreas & Roos, Michael W.M., 2019. "Price-setting with quadratic adjustment costs: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 88-116.
    13. Jacopo Magnani & Aspen Gorry & Ryan Oprea, 2016. "Time and State Dependence in an Ss Decision Experiment," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(1), pages 285-310, January.
    14. Kryvtsov, Oleksiy & Petersen, Luba, 2021. "Central bank communication that works: Lessons from lab experiments," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 760-780.
    15. Hommes, Cars & Massaro, Domenico & Weber, Matthias, 2019. "Monetary policy under behavioral expectations: Theory and experiment," European Economic Review, Elsevier, vol. 118(C), pages 193-212.
    16. Assenza, Tiziana & Grazzini, Jakob & Hommes, Cars & Massaro, Domenico, 2015. "PQ strategies in monopolistic competition: Some insights from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 50(C), pages 62-77.
    17. Douglas Davis, 2016. "Experimental Methods for the General Economist: Five Lessons from the Lab," Southern Economic Journal, John Wiley & Sons, vol. 82(4), pages 1046-1058, April.

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    More about this item

    Keywords

    Market Experiments; Price Rigidities; Information Rigidities; Bounded Rationality;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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