The Sunk Cost Bias and Managerial Pricing Practices
AbstractThis paper provides an explanation for why the sunk cost bias persists among firms in a competitive environment in which rich learning possibilities are allowed. We envision firms that experiment with cost methodologies that are consistent with real-world accounting practices, including ones that confuse the relevance of variable, fixed, and sunk coststo pricing decisions. Firms follow Ã¢â¬ÅnaiveÃ¢â¬ adaptive learning to adjust prices and reinforcement learning to modify their costing methodologies. Costing and pricing practices that increase profits are reinforced. We show that all firms eventually display the sunk cost bias in their pricing behavior
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Date of creation: 29 Mar 2005
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Other versions of this item:
- Nabil Al-Najjar & Sandeep Baliga & David Besanko, 2006. "The Sunk Cost Bias and Managerial Pricing Practices," 2006 Meeting Papers 851, Society for Economic Dynamics.
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-02-20 (All new papers)
- NEP-COM-2005-02-20 (Industrial Competition)
- NEP-MIC-2005-02-20 (Microeconomics)
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