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Optimal price promotion in the presence of asymmetric reference-price effects

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Author Info
Gadi Fibich (Tel Aviv University, Tel Aviv, Israel)
Arieh Gavious (Ben Gurion University, Beer-Sheva, Israel)
Oded Lowengart (Ben Gurion University, Beer-Sheva, Israel)

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Abstract

In this study we demonstrate how a reference price may affect the degree of price rigidity|flexibility. For this, we construct a model of reference-price formation, which we use to analyze the effect of asymmetric reference price (cut 'effects') on the profitability of price promotions. We derive explicit expressions for the additional profits earned during a promotional period due to consumer perception of a 'gain', and for the post-promotion loss of potential profits due to consumer perception of a 'loss'. We show that when effects of losses on demand are greater than effects of gains ('loss aversion'), price promotions always lead to a decline in profits. When, however, effects of gains are larger than those of losses, price promotions, as well as reverse price promotions (i.e. price increase) can be profitable. In the latter case we calculate the optimal depth and duration of a price promotion. We also show that reference price can affect price rigidity and flexibility. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/mde.1333
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Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 28 (2007)
Issue (Month): 6 ()
Pages: 569-577
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Handle: RePEc:wly:mgtdec:v:28:y:2007:i:6:p:569-577

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  2. Dutta, Shantanu, et al, 1999. "Menu Costs, Posted Prices, and Multiproduct Retailers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 683-703, November.
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  3. Daniel Levy & Shantanu Dutta & Mark Bergen & Robert Venable, 1998. "Price adjustment at multiproduct retailers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(2), pages 81-120.
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  1. Daniel Levy, 2007. "Price rigidity and flexibility: recent theoretical developments," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 523-530. [Downloadable!]
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