Document Type

Article

Publication Date

4-28-2016

Abstract

How firms make their pricing decisions is a fundamental question of macroeconomics. We use a laboratory experiment to examine individual choices in a price updating task that provide insight into how well state dependent models reflect behavior. We find that in general subjects behave as if they recognize the importance of a state dependent pricing strategy, but they are unable to ascertain this threshold with precision and they also exhibit a substantial degree of time dependence. As a result, they update prices too frequently, and perform statistically significantly fewer real effort profit-generating tasks than theoretically optimal under full state dependence, which results in statistically significantly lower profits as well.

Comments

NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Economic Dynamics and Control. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Economic Dynamics and Control, volume 68, in 2016. DOI: 10.1016/j.jedc.2016.04.004

The Creative Commons license below applies only to this version of the article.

Peer Reviewed

1

Copyright

Elsevier

Available for download on Saturday, April 28, 2018

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