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Fairness and Short Run Price Adjustment in Posted Offer Markets

In: Handbook of Experimental Economics Results

Author

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  • Kujal, Praveen
  • Smith, Vernon L.

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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Suggested Citation

  • Kujal, Praveen & Smith, Vernon L., 2008. "Fairness and Short Run Price Adjustment in Posted Offer Markets," Handbook of Experimental Economics Results, in: Charles R. Plott & Vernon L. Smith (ed.), Handbook of Experimental Economics Results, edition 1, volume 1, chapter 6, pages 55-61, Elsevier.
    • Handle: RePEc:eee:expchp:1-06
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    Cited by:

    1. Byford, Martin C., 2015. "A theoretical foundation for the undercut-proof equilibrium," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 209-220.
    2. Martin C. Byford, 2018. "Ex-post price stability with convex costs," International Journal of Game Theory, Springer;Game Theory Society, vol. 47(4), pages 1065-1085, November.
    3. Nicholas, Aaron, 2022. "Invisible Hand, invisible morals: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 197(C), pages 395-418.

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    JEL classification:

    • C - Mathematical and Quantitative Methods

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