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  Are 'Rockets and Feathers' Caused by Search or Infromational Frictions?

Ke, C., & Bayer, R.-C. (2011). Are 'Rockets and Feathers' Caused by Search or Infromational Frictions? Working Paper of the Max Planck Institute for Tax Law and Public Finance, 2011-12.

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http://ssrn.com/abstract=1934764 (Preprint)
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 Creators:
Ke, Changxia1, Author           
Bayer, Ralph-C.2, Author
Affiliations:
1Public Economics, MPI for Tax Law and Public Finance, Max Planck Society, ou_830552              
2External Organizations, ou_persistent22              

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Free keywords: Asymmetric Price Adjustment, Price Dispersion, Adaptive Search, Bounded Rationality
 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.

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Language(s): eng - English
 Dates: 2011-09-28
 Publication Status: Published online
 Pages: 35
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Title: Working Paper of the Max Planck Institute for Tax Law and Public Finance
Source Genre: Series
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Pages: - Volume / Issue: 2011-12 Sequence Number: - Start / End Page: - Identifier: -