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What causes rockets and feathers? An experimental investigation

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  • Bayer, Ralph-C
  • Ke, Changxia

Abstract

Prices usually adjust much faster when costs increase than when costs decrease. In spite of the many empirical studies confirming this “Rockets-and-Feathers” phenomenon for different industries, the mechanism driving it is not well understood. We use simple experimental markets with and without search frictions and either privately or publicly observed cost shocks to study how sensitive the ”Rockets-and-Feathers” phenomenon is to changes in search costs and information conditions. In contrast to standard theoretical predictions we observe price dispersion and spontaneous asymmetric price adjustments in all treatments. Neither search costs nor private information on cost shocks are indispensable for prices to adjust asymmetrically in the short term. The initial asymmetry quickly disappears if the direction of the cost shocks are publicly known, while it persists in both treatments with private information.

Suggested Citation

  • Bayer, Ralph-C & Ke, Changxia, 2018. "What causes rockets and feathers? An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 153(C), pages 223-237.
  • Handle: RePEc:eee:jeborg:v:153:y:2018:i:c:p:223-237
    DOI: 10.1016/j.jebo.2018.04.010
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    Cited by:

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    2. Pitschner, Stefan, 2020. "How do firms set prices? Narrative evidence from corporate filings," European Economic Review, Elsevier, vol. 124(C).
    3. Bulutay, Muhammed & Hales, David & Julius, Patrick & Tasch, Weiwei, 2021. "Imperfect Tacit Collusion and Asymmetric Price Transmission," EconStor Preprints 231385, ZBW - Leibniz Information Centre for Economics.

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    More about this item

    Keywords

    Asymmetric price adjustment; Price dispersion; Adaptive search; Bounded rationality;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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

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