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Frequency of price increases and perceived inflation. An experimental investigation

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  • Huber, Odilo W.
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    Abstract

    The effect of frequency of subjective experience of price increases on perceived inflation, i.e. the subjective experience of general price development, is investigated. The paper presents a two-phased psychological model of perceived inflation: first, information about product price increases is gathered in daily purchase. Second, these are integrated into one perceived inflation judgment. In the integration phase, the complexity of the task should trigger heuristic processing: higher frequency of price increases should enhance their availability and thus perceived inflation. Participants simulated purchases in two scenarios. Frequency of products with increased prices was varied while overall expenditure increases as well as relative price increase of individual products were balanced. Experiment 1 presented a high frequency condition with a majority of increased prices relative to previously learned reference prices and a low frequency condition with a majority of stable prices. Experiment 2 balanced cognitive effort for product price change estimation over conditions by replacing absolutely stable prices with slightly increased prices. As predicted, perceived inflation was higher with high frequencies of increased prices, while price increases of individual products were judged correctly. Experiment 3 ruled out the alternative hypothesis that presentation duration, which in the previous experiments correlated with presentation frequency, might have been the determining factor.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Psychology.

    Volume (Year): 32 (2011)
    Issue (Month): 5 ()
    Pages: 651-661

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    Handle: RePEc:eee:joepsy:v:32:y:2011:i:5:p:651-661

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

    Related research

    Keywords: Perceived inflation; Price increase; Purchase frequency; Availability; Bias;

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    References

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    1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
    2. Kemp, Simon, 1991. "Remembering and dating past prices," Journal of Economic Psychology, Elsevier, vol. 12(3), pages 431-445, September.
    3. Herr, Paul M, 1989. " Priming Price: Prior Knowledge and Context Effects," Journal of Consumer Research, University of Chicago Press, vol. 16(1), pages 67-75, June.
    4. Brachinger, Hans Wolfgang, 2008. "A new index of perceived inflation: Assumptions, method, and application to Germany," Journal of Economic Psychology, Elsevier, vol. 29(4), pages 433-457, August.
    5. Friedman, Milton, 1970. "A Theoretical Framework for Monetary Analysis," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 193-238, March-Apr.
    6. Helmut Jungermann & Hans Brachinger & Julia Belting & Katarzyna Grinberg & Elisabeth Zacharias, 2007. "The Euro Changeover and the Factors Influencing Perceived Inflation," Journal of Consumer Policy, Springer, vol. 30(4), pages 405-419, December.
    7. Alba, Joseph W, et al, 1999. " The Effect of Discount Frequency and Depth on Consumer Price Judgments," Journal of Consumer Research, University of Chicago Press, vol. 26(2), pages 99-114, September.
    8. Ranyard, Rob & Missier, Fabio Del & Bonini, Nicolao & Duxbury, Darren & Summers, Barbara, 2008. "Perceptions and expectations of price changes and inflation: A review and conceptual framework," Journal of Economic Psychology, Elsevier, vol. 29(4), pages 378-400, August.
    9. Manfred Fluch & Helmut Stix, 2005. "Perceived Inflation in Austria – Extent, Explanations, Effects," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 22–47.
    10. Antonides, Gerrit, 2008. "How is perceived inflation related to actual price changes in the European Union?," Journal of Economic Psychology, Elsevier, vol. 29(4), pages 417-432, August.
    11. Giovanni Dell'Ariccia & Olivier J. Blanchard & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," IMF Staff Position Notes 2010/03, International Monetary Fund.
    12. Gamble, Amelie, 2006. "Euro illusion or the reverse? Effects of currency and income on evaluations of prices of consumer products," Journal of Economic Psychology, Elsevier, vol. 27(4), pages 531-542, August.
    13. Leiser, David & Drori, Shelly, 2005. "NaIve understanding of inflation," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 34(2), pages 179-198, March.
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    Cited by:
    1. Azar, Ofer H., 2013. "Competitive strategy when consumers are affected by reference prices," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 327-340.
    2. Georganas, Sotiris & Healy, Paul J. & Li, Nan, 2014. "Frequency bias in consumers׳ perceptions of inflation: An experimental study," European Economic Review, Elsevier, vol. 67(C), pages 144-158.

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