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Fairness and short run price adjustment in posted offer markets

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  • Kujal, Praveen
  • Smith, Vernon

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.

Suggested Citation

  • Kujal, Praveen & Smith, Vernon, 2003. "Fairness and short run price adjustment in posted offer markets," UC3M Working papers. Economics we036024, Universidad Carlos III de Madrid. Departamento de Economía.
  • Handle: RePEc:cte:werepe:we036024
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    1. Binmore, Ken & Swierzbinski, Joe & Hsu, Steven & Proulx, Chris, 1993. "Focal Points and Bargaining," International Journal of Game Theory, Springer;Game Theory Society, vol. 22(4), pages 381-409.
    2. Jon Ketcham & Vernon L. Smith & Arlington W. Williams, 1984. "A Comparison of Posted-Offer and Double-Auction Pricing Institutions," Review of Economic Studies, Oxford University Press, vol. 51(4), pages 595-614.
    3. Franciosi, Robert, et al, 1995. "Fairness: Effect on Temporary and Equilibrium Prices in Posted-Offer Markets," Economic Journal, Royal Economic Society, vol. 105(431), pages 938-950, July.
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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.

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