What causes rockets and feathers? An experimental investigation

Ralph-C Bayer () and Changxia Ke

Journal of Economic Behavior & Organization, 2018, vol. 153, issue C, 223-237

Abstract: Prices usually adjust much faster when costs increase than when costs decrease. In spite of the many empirical studies confirming this “Rockets-and-Feathers” phenomenon for different industries, the mechanism driving it is not well understood. We use simple experimental markets with and without search frictions and either privately or publicly observed cost shocks to study how sensitive the ”Rockets-and-Feathers” phenomenon is to changes in search costs and information conditions. In contrast to standard theoretical predictions we observe price dispersion and spontaneous asymmetric price adjustments in all treatments. Neither search costs nor private information on cost shocks are indispensable for prices to adjust asymmetrically in the short term. The initial asymmetry quickly disappears if the direction of the cost shocks are publicly known, while it persists in both treatments with private information.

Keywords: Asymmetric price adjustment; Price dispersion; Adaptive search; Bounded rationality (search for similar items in EconPapers)
JEL-codes: C91 D82 D83 L13 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:153:y:2018:i:c:p:223-237

DOI: 10.1016/j.jebo.2018.04.010

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