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Pricing Scheme Choice: How Process Affects Outcome

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  • Natalia Shestakova
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    Abstract

    Standard price discrimination theories are based on the assumption that consumers use their future demand estimates to evaluate net utility of each pricing scheme and choose the scheme with the highest value. However, some evidence suggests that consumers might not always behave this way. The experiment presented in this paper shows that indeed a substantial proportion of subjects choose not to evaluate the net utility of the offered pricing schemes. Instead, they select from pricing schemes based on a comparison of the schemes' parameters. Interestingly, this selection approach leads to the correct pricing-scheme choice when subjects are not well aware of their demand, and to the incorrect choice when they are. The results call for alternative theories of price discrimination and corresponding policy implications.

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    Bibliographic Info

    Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp411.

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    Date of creation: Jul 2010
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    Handle: RePEc:cer:papers:wp411

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    Keywords: Choice process; heuristics; price discrimination; experiment;

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