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Hysteresis, Price Acceptance, and Reference Prices

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  • Richards, Timothy J.
  • Gómez, Miguel I.
  • Printezis, Iryna

Abstract

The existence of price thresholds in grocery retailing is well-documented. Most authors explain the existence of price thresholds using Assimilation-Contrast Theory (ACT), Adaptation Level Theory (ALT) or Prospect Theory (PT). However, each of these theories is untenable if consumers are believed to behave rationally. We offer a theoretical explanation grounded in Real Options Theory (ROT) and economic hysteresis. We test the ROT hypothesis against three plausible alternatives using a maximum likelihood friction model that we augment for unobserved heterogeneity. Our findings support the ROT hypothesis, and suggests that the existence of price thresholds in aggregate data are driven by a common recognition of real option values, which do not disappear with the inclusion of consumer heterogeneity.

Suggested Citation

  • Richards, Timothy J. & Gómez, Miguel I. & Printezis, Iryna, 2014. "Hysteresis, Price Acceptance, and Reference Prices," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 164872, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea14:164872
    DOI: 10.22004/ag.econ.164872
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    References listed on IDEAS

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    Keywords

    Agribusiness; Agricultural and Food Policy; Consumer/Household Economics; Demand and Price Analysis; Industrial Organization;
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