Overcoming Consumer Biases in the Choice of Pricing Schemes: A Lab Experiment
AbstractThis paper uses experimental data to investigate possible biases in consumers' choice of pricing schemes when their demand is perfectly inelastic but uncertain. I consider threepart pricing schemes (i.e. fixed fee, included units, extra-unit price). The analysis suggests a strong bias towards the pricing scheme with the number of included units equal to the expected demand. I interpret this bias as an “anchoring effect” of the expected demand on consumer decisions. Interestingly, subjects invest less effort into the choice problem when the opportunity cost of a mistake is higher. Still, the higher opportunity cost of a mistake helps subjects overcome the bias.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp418.
Date of creation: Sep 2010
Date of revision:
Contact details of provider:
Postal: P.O. Box 882, Politickych veznu 7, 111 21 Praha 1
Phone: (+420) 224 005 123
Fax: (+420) 224 005 333
Web page: http://www.cerge-ei.cz
More information through EDIRC
heuristics; price discrimination; experiment.;
Find related papers by JEL classification:
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-11 (All new papers)
- NEP-CBE-2010-12-11 (Cognitive & Behavioural Economics)
- NEP-EXP-2010-12-11 (Experimental Economics)
- NEP-MKT-2010-12-11 (Marketing)
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.:
- Esteban, Susanna & Miyagawa, Eiichi & Shum, Matthew, 2003.
"Nonlinear Pricing with Self-Control Preferences,"
10-03-1, Pennsylvania State University, Department of Economics.
- Susanna Esteban & Eiichi Miyagawa & Matthew Shum, 2003. "Nonlinear Pricing with Self-Control Preferences," Discussion Papers 0304-03, Columbia University, Department of Economics.
- Matt Shum & S Esteban & E Miyagawa, 2003. "Nonlinear Pricing with Self-Control Preferences," Economics Working Paper Archive 503, The Johns Hopkins University,Department of Economics.
- Johnson, Eric J. & Camerer, Colin & Sen, Sankar & Rymon, Talia, 2002. "Detecting Failures of Backward Induction: Monitoring Information Search in Sequential Bargaining," Journal of Economic Theory, Elsevier, vol. 104(1), pages 16-47, May.
- Stefano DellaVigna & Ulrike Malmendier, 2006. "Paying Not to Go to the Gym," American Economic Review, American Economic Association, vol. 96(3), pages 694-719, June.
- Ioana Chioveanu & Jidong Zhou, 2012.
"Price Competition and Consumer Confusion,"
CEDI Discussion Paper Series
12-08, Centre for Economic Development and Institutions(CEDI), Brunel University.
- Stefano Della Vigna & Ulrike Malmendier, 2004.
"Contract Design and Self-control: Theory and Evidence,"
The Quarterly Journal of Economics,
MIT Press, vol. 119(2), pages 353-402, May.
- Malmendier, Ulrike M. & Della Vigna, Stefano, 2003. "Contract Design and Self Control: Theory and Evidence," Research Papers 1801, Stanford University, Graduate School of Business.
- Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2006. "Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model," American Economic Review, American Economic Association, vol. 96(4), pages 1043-1068, September.
- Susanna Esteban & Eiichi Miyagawa, 2004.
"Optimal menu of menus with self-control preferences,"
0405-11, Columbia University, Department of Economics.
- Susanna Esteban & Eiichi Miyagawa, 2005. "Optimal Menu of Menus with Self-Control Preferences," NajEcon Working Paper Reviews 784828000000000455, www.najecon.org.
- Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2006. "Do consumers choose the right credit contracts?," Working Paper Series WP-06-11, Federal Reserve Bank of Chicago.
- Eliaz, Kfir & Spiegler, Ran, 2008. "Consumer optimism and price discrimination," Theoretical Economics, Econometric Society, vol. 3(4), December.
- Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
- Kfir Eliaz & Ran Spiegler, 2004.
"Contracting with Diversely Naïve Agents,"
122247000000000530, UCLA Department of Economics.
- Michael D. Grubb, 2006.
"Selling to Overconfident Consumers,"
06-018, Stanford Institute for Economic Policy Research.
- Eugenio J. Miravete, 2003. "Choosing the Wrong Calling Plan? Ignorance and Learning," American Economic Review, American Economic Association, vol. 93(1), pages 297-310, March.
- Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
- Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jana Koudelkova).
If references are entirely missing, you can add them using this form.