Pricing in competitive search markets: Experimental evidence of the roles of price information and fairness perceptions

Using a competitive search (price-posting) model, Lester (2011) shows that improving buyers’ price information can counter-intuitively lead to higher prices. We test this result using a lab experiment. Moving from 0 to 1uninformed buyers leads to higher prices in both 2(seller)x2(buyer) and 2x3 markets: the former as predicted, the latter the opposite of the theoretical prediction. Perceptions of “fair” prices are a powerful driver of behavior. For buyers, these perceptions correlate with price-responsiveness, which varies systematically across treatments and impacts sellers’ pricing incentives. For sellers, these perceptions correlate with under-pricing, which also varies systematically across treatments.