State dependent price setting rules under implicit thresholds: An experiment

Abstract

How firms make their pricing decisions is a fundamental question of macroeconomics. We use a laboratory experiment to examine individual choices in a price updating task that provide insight into how well state dependent models reflect behavior. We find that in general subjects behave as if they recognize the importance of a state dependent pricing strategy, but they are unable to ascertain this threshold with precision and they also exhibit a substantial degree of time dependence. As a result, they update prices too frequently, and perform statistically significantly fewer real effort profit-generating tasks than theoretically optimal under full state dependence, which results in statistically significantly lower profits as well.