Asymmetric price adjustment with costly consumer search: a laboratory study

Abstract

Consumers usually complain that the retail gasoline price responds faster to increases in wholesale prices than to decreases. This phenomenon is emprically well established for many industries. The underlying mechanism is not well understood though. We show that asymmetric price adjustment to cost shocks occurs in experimental markets with search cost and information asymmetry, even when the standard theory predicts no adjustment at all. Analysis of individual behavior reveals that in the presence of bounded rational players, asymmetric price adjustment arises due to differences in learning speeds of buyers after positive and negative production cost shocks