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Price Rigidity in Customer Markets

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  • Jean-Robert Tyran
  • Elke Renner

Abstract

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.

Suggested Citation

  • Jean-Robert Tyran & Elke Renner, 2003. "Price Rigidity in Customer Markets," University of St. Gallen Department of Economics working paper series 2003 2003-16, Department of Economics, University of St. Gallen.
    • Handle: RePEc:usg:dp2003:2003-16
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    Cited by:

    1. Sera Linardi & Colin Camerer, 2021. "Worker-firm relational contracts in the time of shutdowns: experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 24(4), pages 1267-1293, December.
    2. Huck, Steffen & Tyran, Jean-Robert, 2007. "Reciprocity, social ties, and competition in markets for experience goods," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(2), pages 191-203, April.
    3. Nakamura, Emi & Steinsson, Jón, 2011. "Price setting in forward-looking customer markets," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 220-233.
    4. Kleshchelski, Isaac & Vincent, Nicolas, 2009. "Market share and price rigidity," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 344-352, April.
    5. Eyster, Erik & Madarász, Kristóf & Michaillat, Pascal, 2014. "The curse of inflation," LSE Research Online Documents on Economics 86325, London School of Economics and Political Science, LSE Library.
    6. Herz, Holger & Schmutzler, Armin & Volk, André, 2019. "Cooperation and mistrust in relational contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 366-380.
    7. Engle-Warnick, Jim & Slonim, Robert L., 2004. "The evolution of strategies in a repeated trust game," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 553-573, December.
    8. Andrew T. Young & Alexander K. Blue, 2007. "Retail prices during a change in monetary regimes: evidence from Sears, Roebuck catalogs, 1938-1951," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 763-775.
    9. Young, Andrew T. & Levy, Daniel, 2014. "Explicit Evidence of an Implicit Contract," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 30(4), pages 804-832.
    10. Alberto Cavallo & Eduardo Cavallo & Roberto Rigobon, 2014. "Prices and Supply Disruptions during Natural Disasters," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(S2), pages 449-471, November.
    11. Riedl, Arno & Tyran, Jean-Robert, 2005. "Tax liability side equivalence in gift-exchange labor markets," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2369-2382, December.
    12. Pau Roldan & Sophia Gilbukh, 2017. "Firm Dynamics and Pricing under Customer Capital Accumulation," 2017 Meeting Papers 1235, Society for Economic Dynamics.
    13. Ginny Seung Choi & Virgil Henry Storr, 2018. "Market institutions and the evolution of culture," Evolutionary and Institutional Economics Review, Springer, vol. 15(2), pages 243-265, December.
    14. M. Alper Cenesiz, 2007. "A New Cost Channel of Monetary Policy," Money Macro and Finance (MMF) Research Group Conference 2006 68, Money Macro and Finance Research Group.
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    16. Nicolas Vincent, 2012. "Price Stickiness in Customer Markets with Reference Prices," Cahiers de recherche 1230, CIRPEE.
    17. Nejat Anbarci & Nick Feltovich, 2018. "Pricing in Competitive Search Markets: The Roles of Price Information and Fairness Perceptions," Management Science, INFORMS, vol. 64(3), pages 1101-1120, March.

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    More about this item

    Keywords

    Customer market; price stickiness; customer loyalty;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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