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

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