Fairness: Effect on Temporary and Equilibrium Prices in Posted Offer Markets

Abstract

Questionnaire studies suggest that perceptions of fairness cause people to resist price increases following abrupt changes in conditions with no cost justification. This hypothesis is examined in posted-offer markets extending previous work. Consistent with the hypothesis, in the profit disclosure (fairness) treatment prices are initially below those in the cost and the no disclosure treatments. But over time prices in all treatments converge to the competitive surplus maximising equilibrium. Thus 'fairness' is interpreted as being the result of expectations that are not sustainable. Expectations adapt as the market converges to the standard competitive equilibrium prediction.