Common Knowledge Reference Price and Asymmetric Price Adjustments |
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Authors: | Marc Hofstetter Jorge Tovar |
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Institution: | (1) Doermer School of Business and Management Sciences, Indiana University-Purdue University Fort Wayne, 2101 E. Coliseum Blvd., Fort Wayne, IN 46805, USA |
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Abstract: | There is abundant empirical evidence showing that asymmetric price adjustments exist in a wide variety of markets. Prices
tend to rise faster when costs rise, relative to the rate at which prices drop when costs fall. This paper argues that a common
knowledge reference price—a government suggested retail price—eases the existence of asymmetric price adjustments in a scenario
where costs are ever-increasing. Our analysis of the Colombian retail gasoline market suggests that when costs rise by more
than the reference price, prices tend to rise more slowly relative to when costs grow by less than the reference price. |
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