Determinants of Price Formation in Jember Regency, Indonesia

Price stability is a prerequisite in maintaining economic growth. Price stability or inflation in Indonesia has become the sole end target of the implementation of the monetary policy framework. However, the dynamic of inflation movement is predicted to result from the increase in commodity prices and domestic demand. This study aims to analyze the behavior of market participants in responding to information that potentially increases and lowers prices and the character of rationality owned by traders in Jember Regency. Based on the results of analysis of the condition of the occurrence of price changes, in general the cases of price increase or decrease are still dominated by the purchase price of the goods themselves. Meanwhile, the results of risk analysis of traders’ preference showed that traders’ response is asymmetric. Traders as the subjects tend to choose the option that gives certainty although it is harmful. The action and reaction between traders in the cases of price increase or decrease in one of the main commodities generate dominant strategies. The dominant strategies are taken when traders are in optimal conditions and react with each other. DOI: 10.5901/mjss.2016.v7n4p4