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Nominal Price Shocks in Monopolistically Competitive Markets: An Experimental Analysis

  • Douglas D. Davis


    (Department of Economics, VCU School of Business)

  • Korenok Oleg


    (Department of Economics, VCU School of Business)

We report a market experiment that examines the capacity of price and information frictions to explain real responses to nominal price shocks. As predicted by the standard dynamic adjustment models, we find that both price and information frictions impede the response to a nominal shock. We also find, however, that the observed adjustment delays far exceed predicted levels. Results of a pair of subsequent treatments indicate that a combination of announcing the shock privately to all sellers (rather than publicly) and a failure of many sellers to best respond to their expectations explains the observed adjustment inertia.

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Paper provided by VCU School of Business, Department of Economics in its series Working Papers with number 1003.

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Length: 27 pages
Date of creation: Jun 2010
Date of revision: Jun 2011
Handle: RePEc:vcu:wpaper:1003
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  1. Ernst Fehr & Jean-Robert Tyran, . "Does Money Illusion Matter?," IEW - Working Papers 012, Institute for Empirical Research in Economics - University of Zurich.
  2. Steffen Huck & Hans-Theo Normann & Joerg Oechssler, 1997. "Stability of the Cournot Process - Experimental Evidence," Experimental 9707002, EconWPA.
  3. Davis, Douglas D. & Wilson, Bart J., 2005. "Differentiated product competition and the Antitrust Logit Model: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 57(1), pages 89-113, May.
  4. Garcia-Gallego, Aurora & Georgantzis, Nikolaos, 2001. "Multiproduct activity in an experimental differentiated oligopoly," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 493-518, March.
  5. Williams, Arlington W, 1987. "The Formation of Price Forecasts in Experimental Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 1-18, February.
  6. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-51, September.
  7. repec:tpr:qjecon:v:104:y:1989:i:3:p:463-83 is not listed on IDEAS
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