IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Rockets and Feathers in the Laboratory

Listed author(s):
  • Ralph-C Bayer
  • Changxia Ke

Consumers often complain that retail prices respond faster to increases in wholesale prices than to decreases. Despite many empirical studies confirming this "Rockets-and-Feathers" phenomenon for different industries, the mechan¬ism driving it is not well understood. In this paper, we show that, in contrast to the theoretical prediction, asymmetric price adjustment to cost shocks, as well as price dispersion, arises in experimental Diamond (1971) markets. The analysis of individual behavior suggests that the observed price dispersion can be explained by bounded rationality, as our data are well explained by Quantal Response Equilibrium (McKelvey and Palfrey 1995). Asymmetric price adjustment is caused by the buyers with adaptive expectation updating differently quickly after positive and negative shocks.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.tax.mpg.de/RePEc/mpi/wpaper/Tax-MPG-RPS-2011-10.pdf
File Function: Full text (original version)
Download Restriction: no

Paper provided by Max Planck Institute for Tax Law and Public Finance in its series Working Papers with number rockets_and_feathers_in_the_laboratory.

as
in new window

Length: 39 pages
Date of creation: Sep 2011
Handle: RePEc:mpi:wpaper:rockets_and_feathers_in_the_laboratory
Contact details of provider: Postal:
Marstallplatz 1, 80539 München

Phone: +49 89 24246 0
Fax: +49 89 24246 501
Web page: http://www.tax.mpg.de/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window

  1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, September.
  2. Avishay Braverman, 1980. "Consumer Search and Alternative Market Equilibria," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 487-502.
  3. Matthew S. Lewis, 2011. "Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 409-449, 06.
  4. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2002. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Journal of Economic Theory, Elsevier, vol. 104(1), pages 247-272, May.
  5. Sam Peltzman, 1998. "Prices Rise Faster Than They Fall," University of Chicago - George G. Stigler Center for Study of Economy and State 142, Chicago - Center for Study of Economy and State.
  6. Dufwenberg, M. & Gneezy, U., 1998. "Price Competition and Market COncentration: An Experimental Study," Papers 1998-08, Uppsala - Working Paper Series.
  7. Michael R. Baye & John Morgan, 2004. "Price Dispersion in the Lab and on the Internet: Theory and Evidence," Working Papers 2004-02, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  8. McKelvey, Richard D. & Palfrey, Thomas R., 1995. "Quantal Response Equilibria for Extensive Form Games," Working Papers 947, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Severin Borenstein & A. Colin Cameron, 1992. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," NBER Working Papers 4138, National Bureau of Economic Research, Inc.
  10. David Neumark & Steven A. Sharpe, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 657-680.
  11. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
  12. Jennifer F. Reinganum, 1978. "A Simple Model of Equilibrium Price Dispersion," Discussion Papers 335, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Timothy N. Cason & Daniel Friedman, 2000. "Buyer Search and Price Dispersion: A Laboratory Study," Econometric Society World Congress 2000 Contributed Papers 1549, Econometric Society.
  14. David, Douglas D & Holt, Charles A, 1996. "Consumer Search Costs and Market Performance," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 133-151, January.
  15. Levy, Daniel & Chen, Haipeng (Allan) & Ray, Sourav & Bergen, Mark, 2006. "Asymmetric Price Adjustment in the Small," MPRA Paper 1097, University Library of Munich, Germany.
  16. Ellingsen, Tore & Friberg, Richard & Hassler, John, 2006. "Menu Costs and Asymmetric Price Adjustment," CEPR Discussion Papers 5749, C.E.P.R. Discussion Papers.
  17. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
  18. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
  19. Harper, Daniel C. & Goodwin, Barry K., 1999. "Price Transmission, Threshold Behavior, And Asymmetric Adjustment In The U.S. Pork Sector," 1999 Annual meeting, August 8-11, Nashville, TN 21666, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  20. Tyran, Jean-Robert, 2003. "Behavioral Game Theory. Experiments in Strategic Interaction: Colin F. Camerer, Princeton University Press, Princeton, New Jersey, 2003, p. 550, Price $65.00/[UK pound]42.95, ISBN 0-691-09039-4," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 32(6), pages 717-720, December.
  21. repec:cdl:compol:23177 is not listed on IDEAS
  22. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-945, September.
  23. Rafael Rob, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 487-504.
  24. Galeotti, Marzio & Lanza, Alessandro & Manera, Matteo, 2003. "Rockets and feathers revisited: an international comparison on European gasoline markets," Energy Economics, Elsevier, vol. 25(2), pages 175-190, March.
  25. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-493, June.
  26. Martin Sefton & Abdullah Yavas & Eric Abrams, 2000. "An experimental comparison of two search models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(3), pages 735-749.
  27. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
  28. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  29. Bacon, Robert W., 1991. "Rockets and feathers: the asymmetric speed of adjustment of UK retail gasoline prices to cost changes," Energy Economics, Elsevier, vol. 13(3), pages 211-218, July.
  30. David M. Grether & Alan Schwartz & Louis L. Wilde, 1988. "Uncertainty and Shopping Behaviour: An Experimental Analysis," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 323-342.
  31. Mariano Tappata, 2009. "Rockets and feathers: Understanding asymmetric pricing," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 673-687.
  32. Andrew Eckert, 2002. "Retail price cycles and response asymmetry," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 52-77, February.
  33. Daniel Tsiddon, 1993. "The (Mis)Behaviour of the Aggregate Price Level," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 889-902.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:mpi:wpaper:rockets_and_feathers_in_the_laboratory. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Hans Mueller)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.