Price Stickiness and Strategic Uncertainty: An Experimental Study

Abstract

We identify a minimal set of components to generate price stickiness by a laboratory experiment on an oligopolistic price setting game. Our design involves repeated aggregate shocks to the market but features no uncertainty in their timing and magnitude, no real-nominal distinction, or no need to compute the best response to the prices of the other subjects. We find persistent price stickiness when prices are strategic complements and fully anticipated shocks lower the equilibrium price. We argue that the observed downward stickiness can be attributed to the presence of strategic uncertainty and strategic complementarity, combined with an asymmetric payoff structure such that adjusting an individual price faster than others toward the lower equilibrium price can potentially lead to a significant loss, compared to faster adjustment to the higher equilibrium price. Show more