Price Rigidity in Customer Markets

Posted: 19 Apr 2005

See all articles by Elke Renner

Elke Renner

University of Nottingham

Jean-Robert Tyran

University of Vienna; University of Copenhagen - Department of Economics; Centre for Economic Policy Research (CEPR)

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Abstract

Customer markets are characterized by long-term relationships between buyers and sellers that 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 relationship. We experimentally show that mutually beneficial long-term relationships 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 relationships in 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

Suggested Citation

Renner, Elke and Tyran, Jean-Robert, Price Rigidity in Customer Markets. Journal of Economic Behavior & Organization, Vol. 55, pp. 575-593, 2004, Available at SSRN: https://ssrn.com/abstract=699922

Elke Renner

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Jean-Robert Tyran (Contact Author)

University of Vienna ( email )

Oskar-Morgenstern-Platz 1
Vienna, Vienna 1090
Austria

HOME PAGE: http://homepage.univie.ac.at/jean-robert.tyran/

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+45 353 23 027 (Phone)

HOME PAGE: http://www.econ.ku.dk/tyran/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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