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Are "Rockets and Feathers" Caused by Search or Informational Frictions

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  • Ralph-C Bayer
  • Changxia Ke

Abstract

Prices usually adjust much faster when costs increase than when costs decrease. The mechanism driving this "Rockets-and-Feathers" phenomenon is not well understood despite of ample empirical evidence for its existence. We use simple experimental markets with and without consumer search and either privately or publicly observed cost shocks to study this puzzle. In contrast to the theoretical predictions, we observe price dispersion and asymmetric price adjustment in all four settings. We attribute the pricing behavior to bounded rationality and its interaction with adaptive expectations. We conclude that neither search costs nor private information are indispensable for prices to adjust asymmetrically.

Suggested Citation

  • Ralph-C Bayer & Changxia Ke, 2011. "Are "Rockets and Feathers" Caused by Search or Informational Frictions," Working Papers are_rockets_and_feathers_, Max Planck Institute for Tax Law and Public Finance.
  • Handle: RePEc:mpi:wpaper:are_rockets_and_feathers_caused_by_search_or_informational_frictions
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    File URL: http://www.tax.mpg.de/RePEc/mpi/wpaper/Tax-MPG-RPS-2011-12.pdf
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    References listed on IDEAS

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    1. repec:cdl:compol:23177 is not listed on IDEAS
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    4. Grether, David M. & Schwartz, Alan & Wilde, Louis L., "undated". "Uncertainty and Shopping Behavior: An Experimental Analysis," Working Papers 511, California Institute of Technology, Division of the Humanities and Social Sciences.
    5. Matthew S. Lewis & Howard P. Marvel, 2011. "When Do Consumers Search?," Journal of Industrial Economics, Wiley Blackwell, vol. 59(3), pages 457-483, September.
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    Citations

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    Cited by:

    1. Ralph-C. Bayer & Hang Wu & Mickey Chan, 2014. "Special Section: Experiments on Learning, Methods, and Voting," Pacific Economic Review, Wiley Blackwell, vol. 19(3), pages 278-295, August.
    2. Wu, Hang & Bayer, Ralph-C, 2015. "Learning from inferred foregone payoffs," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 445-458.
    3. Ralph-C. Bayer & Hang Wu & Mickey Chan, 2013. "Explaining Price Dispersion and Dynamics in Laboratory Bertrand Markets," School of Economics Working Papers 2013-16, University of Adelaide, School of Economics.

    More about this item

    Keywords

    Asymmetric Price Adjustment; Price Dispersion; Adaptive Search; Bounded Rationality;

    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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