Chapter 6 Fairness and Short Run Price Adjustment in Posted Offer Markets

This chapter hypothesizes that any short-run failure of markets to clear depends upon buyers knowing that increased profits result from higher prices. In the absence of this knowledge buyers may give in quickly to the equilibrating tendencies of the market. The chapter suggests that fairness' in our context is best characterized as affecting agent expectations and not their utility functions. That is, buyers feel that price increases resulting from cost increases should not produce higher profits for sellers. Sellers, accepting this norm of fair treatment, do not initially attempt to raise prices and extract higher profit. In the absence of obtaining utility from being fair, over time, sellers gradually raise prices and reap higher profits. This adaptation to a higher price is due to the competitive behavior of both buyers and sellers. Some buyers realize that there are gains (higher consumer surplus) from trade from buying at slightly higher prices.