A Laboratory Study of Customer Markets

Abstract

Abstract In our laboratory customer markets, sellers post price and buyers incur cost (controlled at zero, low and high values) when they switch to a new seller. Sellers’ production costs follow various random walks in 28 sessions, each with 50-100 trading periods. We find that prices are sticky, and sellers absorb almost half of their cost shocks. Transaction prices are about 10 percent higher when buyers face positive switch costs, and trading efficiency is slightly impaired. Experienced buyers switch about 10 percent of the time with either high or low switch costs. Buyers switch more often when they face a higher posted price, have a lower valuation for the good, face lower switch costs, have more time remaining, and have more favorable information on alternative prices. Sellers price higher when they have more attached buyers, when buyers have less information on rivals’ prices, when rivals post higher prices, and when less time remains.