Rockets and Feathers in the Laboratory

Ralph-C Bayer () and Changxia Ke
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Changxia Ke: Max Planck Institute

No 2010-20, School of Economics and Public Policy Working Papers from University of Adelaide, School of Economics and Public Policy

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 negahttps://media.adelaide.edu.au/economics/

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: 37 pages
Date: 2010-10
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (1)

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Working Paper: Rockets and Feathers in the Laboratory (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:adl:wpaper:2010-20

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