FAIRNESS AND SHORT RUN PRICE ADJUSTMENT IN POSTED OFFER MARKETS

Praveen Kujal () and Vernon Smith

Economics Working Papers from Universidad Carlos III, Departamento de Economía

Abstract: Questionnaire studies show that perceptions of fairness cause people to resist price increases following abrupt changes in conditions with no cost justification. We examine this hypothesis in posted-offer markets extending previous work. Consistent with the hypothesis, in the profit disclosure (fairness) treatment prices are initially below those in the cost and the no disclosure treatments. Over time prices converge in all treatments to the competitive surplus maximizing equilibrium. Fairness is thus interpreted as being a result of expectations that are not sustainable. Expectations adapt as the market converges to the predicted competitive equilibrium.

New Economics Papers: this item is included in nep-cbe and nep-exp
Date: 2003-11
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