Pricing in Competitive Search Markets: The Roles of Price Information and Fairness Perceptions

We use a competitive search (price-posting) framework to experimentally examine how buyer information and fairness perceptions affect market behavior. We observe that moving from zero to one uninformed buyers leads to higher prices in both 2 (seller)×2 (buyer) and 2 × 3 markets: the former as predicted under standard preferences, the latter the opposite of the theoretical prediction. Perceptions of fair prices—elicited in the experiment—are a powerful driver of behavior. For buyers, fair prices correlate with price responsiveness, which varies systematically across treatments and impacts sellers’ pricing incentives. For sellers, fair prices correlate with underpricing, which also varies systematically across treatments.

Data and the online appendix are available at https://doi.org/10.1287/mnsc.2016.2620.

This paper was accepted by Uri Gneezy, behavioral economics.