Nominal Price Shocks in Monopolistically Competitive Markets: An Experimental Analysis

Douglas Davis and Oleg Korenok

No 1003, Working Papers from VCU School of Business, Department of Economics

Abstract: We report a market experiment that examines the capacity of price and information frictions to explain real responses to nominal price shocks. As predicted by the standard dynamic adjustment models, we find that both price and information frictions impede the response to a nominal shock. We also find, however, that the observed adjustment delays far exceed predicted levels. Results of a pair of subsequent treatments indicate that a combination of announcing the shock privately to all sellers (rather than publicly) and a failure of many sellers to best respond to their expectations explains the observed adjustment inertia.

Keywords: Market Experiments; Price Rigidities; Information Rigidities; Bounded Rationality (search for similar items in EconPapers)
JEL-codes: C9 E42 E47 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2010-06, Revised 2011-06
New Economics Papers: this item is included in nep-cba and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:vcu:wpaper:1003

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