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Rockets and Feathers in the Laboratory

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  • Ralph-C Bayer
  • Changxia Ke

Abstract

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.

Suggested Citation

  • Ralph-C Bayer & Changxia Ke, 2011. "Rockets and Feathers in the Laboratory," Working Papers rockets_and_feathers_in_t, Max Planck Institute for Tax Law and Public Finance.
  • Handle: RePEc:mpi:wpaper:rockets_and_feathers_in_the_laboratory
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    References listed on IDEAS

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    Cited by:

    1. Bayer, Ralph-C. & Ke, Changxia, 2013. "Discounts and consumer search behavior: The role of framing," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 215-224.

    More about this item

    Keywords

    Asymmetric Price Adjustment; Search Cost; Price Dispersion; Bounded Rationality; Quantal Response Equilibrium;

    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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