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State dependent price setting rules under implicit thresholds: An experiment

Justin D. LeBlanc, Andrea Civelli (), Cary Deck and Klajdi Bregu

Journal of Economic Dynamics and Control, 2016, vol. 68, issue C, 17-44

Abstract: How firms make their pricing decisions is a fundamental question of macroeconomics. We use a laboratory experiment to examine individual choices in a price updating task that provide insight into how well state dependent models reflect behavior. We find that in general subjects behave as if they recognize the importance of a state dependent pricing strategy, but they are unable to ascertain this threshold with precision and they also exhibit a substantial degree of time dependence. As a result, they update prices too frequently, and perform statistically significantly fewer real effort profit-generating tasks than theoretically optimal under full state dependence, which results in statistically significantly lower profits as well.

Keywords: Laboratory experiments; Price rigidity; State dependent models; Dynamic pricing (search for similar items in EconPapers)
JEL-codes: C91 D03 D21 E30 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.jedc.2016.04.004

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