Demand Cross Elasticity Without Substitutability: Evidence from an Experiment

26 Pages Posted: 29 May 2010  

Luigi Luini

University of Siena - Department of Economics

Pierluigi Sabbatini

Government of the Italian Republic (Italy) - Italian Competition Authority

Date Written: May 27, 2010

Abstract

We study a market where goods are produced under low marginal costs with a poor degree of substitutability among products. In such an environment we ran an experiment in order to explain why prices are interdependent even when preferences are independent. We compare our results to previous theoretical and laboratory experimental literature on price fairness. We find that, even in absence of interaction among subjects, price fairness/unfairness do play a major role in accepting/rejecting a deal. Subjects tend to be more resistant to a price increase and reject a deal when the favourite product is not anchored to price increases of not substitutable products, if these products are considered to be a benchmark for fair conduct. Therefore demand cross elasticity can arise also between products which are not substitutes. This result has an important implication for the delineation of an antitrust market. Due to fairness concerns, in the markets that we consider products which are not interchangeable should be included in the relevant market.

Keywords: Price Reference, Anchoring Heuristic, Unfairness, Relevant Market

JEL Classification: C93, D12, K21

Suggested Citation

Luini , Luigi and Sabbatini, Pierluigi, Demand Cross Elasticity Without Substitutability: Evidence from an Experiment (May 27, 2010). Available at SSRN: https://ssrn.com/abstract=1617337 or http://dx.doi.org/10.2139/ssrn.1617337

Luigi Luini

University of Siena - Department of Economics ( email )

Piazza S. Francesco, 7
Siena, I-53100
Italy

Pierluigi Sabbatini (Contact Author)

Government of the Italian Republic (Italy) - Italian Competition Authority ( email )

Piazza Verdi 6/a
00187 Roma, 00198
Italy
0039 0685821369 (Phone)
0039 0685452369 (Fax)

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