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Consumer bounded rationality and rigidity/flexibility retail price patterns

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  • Spiegler, Ran

Abstract

I revisit the model of market competition with boundedly rational consumers due to Spiegler (2006), in which firms compete in price distributions and consumers use a naive sampling procedure to evaluate them. I assume that firms can assign weight to arbitrarily low prices, and consumers have a non-trivial ex ante outside option. In symmetric Nash equilibrium, firms charge a high “regular price” with positive probability, and in addition randomize continuously over an interval of “sale” prices that are bounded away from the regular price. Sales become less frequent but more drastic as the number of competitors increases and as the consumer’s outside option becomes more attractive.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 116 (2012)
Issue (Month): 3 ()
Pages: 335-338

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Handle: RePEc:eee:ecolet:v:116:y:2012:i:3:p:335-338

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: Bounded rationality; Industrial organization; Sales; Regular prices; Price rigidity; Sampling;

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  1. Spiegler, Ran, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 1(2), pages 207-231, June.
  2. Osborne, Martin J & Rubinstein, Ariel, 1998. "Games with Procedurally Rational Players," American Economic Review, American Economic Association, vol. 88(4), pages 834-47, September.
  3. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284 Elsevier.
  4. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261.
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