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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Friebel, Guido / Mendola, Mariapia / Requate, Till / Tsui, Kevin / Wichardt, Philipp / Zulehner, Christine

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A Laboratory Study of Customer Markets

Timothy N. Cason1 / Daniel Friedman2

1Purdue University,

2University of California, Santa Cruz,

Citation Information: Advances in Economic Analysis & Policy. Volume 2, Issue 1, ISSN (Online) 1538-0637, DOI: 10.2202/1538-0637.1020, February 2002

Publication History

Published Online:
2002-02-13

Abstract

In our laboratory customer markets, sellers post price and buyers incur cost (controlled at zero, low and high values) when they switch to a new seller. Sellers’ production costs follow various random walks in 28 sessions, each with 50-100 trading periods.

We find that prices are sticky, and sellers absorb almost half of their cost shocks. Transaction prices are about 10 percent higher when buyers face positive switch costs, and trading efficiency is slightly impaired. Experienced buyers switch about 10 percent of the time with either high or low switch costs. Buyers switch more often when they face a higher posted price, have a lower valuation for the good, face lower switch costs, have more time remaining, and have more favorable information on alternative prices. Sellers price higher when they have more attached buyers, when buyers have less information on rivals’ prices, when rivals post higher prices, and when less time remains.

Keywords: experiment; switch costs; market power

Citing Articles

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[1]
Isaac Kleshchelski and Nicolas Vincent
Journal of Monetary Economics, 2009, Volume 56, Number 3, Page 344
[2]
Emi Nakamura and Jón Steinsson
Journal of Monetary Economics, 2011, Volume 58, Number 3, Page 220
[3]
Cary A. Deck and Bart J. Wilson
Journal of Economic Behavior & Organization, 2008, Volume 67, Number 1, Page 134

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