Price Rigidity in Customer Markets
University of St. Gallen Economics Discussion Paper No. 2003-16
41 Pages Posted: 23 Oct 2003
Date Written: September 2003
Customer markets are characterized by long-term relations between buyers and sellers. Long-term relations evolve if buyers trust sellers to provide high quality and if sellers are trustworthy. However, changes in the terms of this implicit contract may antagonize customers and disrupt the relation. We experimentally show that mutually beneficial long-term relations frequently prevail in markets for experience goods, and that price rigidity after a temporary cost shock is much more pronounced if price increases cannot be justified by cost increases. Hence, long-term relations on customer markets mitigate market failure of the "lemons" type, but are prone to price stickiness.
Keywords: Customer market, price stickiness, customer loyalty
JEL Classification: C92, D43, L14, Z13
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