Are 'Rockets and Feathers' Caused by Search or Informational Frictions?

37 Pages Posted: 28 Sep 2011 Last revised: 31 Oct 2011

See all articles by Ralph C. Bayer

Ralph C. Bayer

University of Adelaide

Changxia Ke

Lingnan (University) College, Sun Yat-sen University

Date Written: September 2011

Abstract

Prices usually adjust much faster when costs increase than when costs decrease. The mechanism driving this “Rockets-and-Feathers” phenomenon is not well understood despite of ample empirical evidence for its existence.

We use simple experimental markets with and without consumer search and either privately or publicly observed cost shocks to study this puzzle. In contrast to the theoretical predictions, we observe price dispersion and asymmetric price adjustment in all four settings. We attribute the pricing behavior to bounded rationality and its interaction with adaptive expectations. We conclude that neither search costs nor private information are indispensable for prices to adjust asymmetrically.

Keywords: Asymmetric Price Adjustment, Price Dispersion, Adaptive Search, Bounded Rationality

JEL Classification: D82, D83, C91, L13

Suggested Citation

Bayer, Ralph C. and Ke, Changxia, Are 'Rockets and Feathers' Caused by Search or Informational Frictions? (September 2011). Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2011-12, Available at SSRN: https://ssrn.com/abstract=1934764 or http://dx.doi.org/10.2139/ssrn.1934764

Ralph C. Bayer (Contact Author)

University of Adelaide ( email )

No 233 North Terrace, School of Commerce
Adelaide, South Australia 5005
Australia

Changxia Ke

Lingnan (University) College, Sun Yat-sen University ( email )

135 Xingang Xi Road
Guangzhou, Guangdong 510275
China

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