Monday, July 19, 2010
Demand Cross Elasticity Without Substitutability: Evidence from an Experiment
Posted by D. Daniel Sokol
Luigi Luini, University of Siena - Department of Economics and Pierluigi Sabbatini, Government of the Italian Republic (Italy) - Italian Competition Authority address Demand Cross Elasticity Without Substitutability: Evidence from an Experiment.
ABSTRACT: We study a market where goods are produced under low marginal costs with a poor degree of substitutability among products. In such an environment we ran an experiment in order to explain why prices are interdependent even when preferences are independent. We compare our results to previous theoretical and laboratory experimental literature on price fairness. We find that, even in absence of interaction among subjects, price fairness/unfairness do play a major role in accepting/rejecting a deal. Subjects tend to be more resistant to a price increase and reject a deal when the favourite product is not anchored to price increases of not substitutable products, if these products are considered to be a benchmark for fair conduct. Therefore demand cross elasticity can arise also between products which are not substitutes. This result has an important implication for the delineation of an antitrust market. Due to fairness concerns, in the markets that we consider products which are not interchangeable should be included in the relevant market.