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Rockets and Feathers in the Laboratory

MPS-Authors
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Ke,  Changxia
Public Economics, MPI for Intellectual Property, Competition and Tax Law, Max Planck Society;

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wp2010-20.pdf
(Preprint), 395KB

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Citation

Ke, C., & Bayer, R.-C. (2010). Rockets and Feathers in the Laboratory. University of Adelaide, School of Economics Research Paper, 2010-20.


Cite as: http://hdl.handle.net/11858/00-001M-0000-0011-4E07-2
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 mechanism 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 updating speed of buyers with adaptive expectations being different after positive and negative cost shocks.