Rockets and Feathers in the Laboratory

Ralph-C Bayer () and Changxia Ke

Working Papers from Max Planck Institute for Tax Law and Public Finance

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.

Keywords: Asymmetric Price Adjustment; Search Cost; Price Dispersion; Bounded Rationality; Quantal Response Equilibrium (search for similar items in EconPapers)
JEL-codes: C91 D82 D83 L13 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2011-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.tax.mpg.de/RePEc/mpi/wpaper/Tax-MPG-RPS-2011-10.pdf Full text (original version) (application/pdf)

Related works:
Working Paper: Rockets and Feathers in the Laboratory (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mpi:wpaper:rockets_and_feathers_in_the_laboratory

Access Statistics for this paper

More papers in Working Papers from Max Planck Institute for Tax Law and Public Finance Contact information at EDIRC.
Bibliographic data for series maintained by Hans Mueller ().