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Cash versus installment purchasing: contrasting axiomatic and experimental approaches to a new concept

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  • Troutt, Marvin D.
  • Acar, William

Abstract

This paper has a dual thrust. First, it provides a parsimonious theoretical investigation into a commonly vexing issue, that of the vast discrepancy between what people are willing to pay in a lump sum and the total present value of installments to which they are willing to commit. An annuity may be regarded as a multi-attributed bundle of monetary amounts and time spacings. The classical Present Value, or discounted cash flow, formula using a market interest rate is only one among many multiattribute valuation functions which may conceivably apply for a given decision-maker. By use of a concept of a "now-equivalent" for an annuity, and some simple assumptions, we show that there exists a personal interest rate that must be at least as high as the prevailing market interest rate. Several implications are noted. In particular, it is argued that cultural pricing habits such as routine use of monthly payments may lead to confusion about the meaning of demand for credit. A second contribution of this paper is to demonstrate the power of the axiomatic methodological approach, by showing how it can parsimoniously yield insight into an issue commonly viewed as purely behavioral and only amenable to empirical treatment.

Suggested Citation

  • Troutt, Marvin D. & Acar, William, 2003. "Cash versus installment purchasing: contrasting axiomatic and experimental approaches to a new concept," Omega, Elsevier, vol. 31(5), pages 379-385, October.
    • Handle: RePEc:eee:jomega:v:31:y:2003:i:5:p:379-385
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    References listed on IDEAS

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    1. Russell L. Ackoff, 1981. "The Art and Science of Mess Management," Interfaces, INFORMS, vol. 11(1), pages 20-26, February.
    2. Rolf Färe & Shawna Grosskopf, 2000. "Research Note. Decomposing Technical Efficiency with Care," Management Science, INFORMS, vol. 46(1), pages 167-168, January.
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    Cited by:

    1. Ni, Jian & Chu, Lap Keung & Li, Qiang, 2017. "Capacity decisions with debt financing: The effects of agency problem," European Journal of Operational Research, Elsevier, vol. 261(3), pages 1158-1169.
    2. Wu, Chin-Chun & Chou, Chao-Yu & Huang, Chikong, 2009. "Optimal price, warranty length and production rate for free replacement policy in the static demand market," Omega, Elsevier, vol. 37(1), pages 29-39, February.

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