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Price rigidity in customer markets

  • Renner, Elke
  • Tyran, Jean-Robert

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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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. Harvey James, 2002. "On the Reliability of Trusting," Microeconomics 0202002, EconWPA.
  2. Daniel Levy & Andrew Young, 2004. ""The Real Thing:" Nominal Price Rigidity of the Nickel Coke, 1886-1959," Emory Economics 0405, Department of Economics, Emory University (Atlanta).
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  11. Mark A. Wynne, 1995. "Sticky prices: what is the evidence?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 1-12.
  12. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  13. 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.
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  15. 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.
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