Demand cross elasticity without substitutability: An experiment

We study a market in which goods are produced under low marginal costs with a poor degree of substitutability among products. In this environment we ran an experiment 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 the absence of interaction among subjects, price fairness/unfairness does play a major role in the decision to accept or reject a deal. Subjects tend to be more resistant to a price increase and reject a deal when the preferred product is not referenced to price increases of not substitute products, if these products are considered to be a benchmark for fair conduct. Thus demand cross elasticity can arise between products that are not substitutes. This result has important implications for antitrust policy. In delineating a market perimeter, fairness concerns suggest that products that are similar but not interchangeable should be included in the relevant antitrust market.

► We model a market with similar but not substitute products.
► We ran an experiment on music CD market to discover if prices can be interdependent even when preferences are independent.
► We find that price fairness/unfairness is a novel source of demand cross elasticity.
► In delineating a market perimeter, products that are similar but not interchangeable should be included in the relevant antitrust market.