Consumer Cognition and Pricing in the 9's in Oligopolistic Markets

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Consumer Cognition and Pricing in the 9's in Oligopolistic Markets

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Basu, Kaushik (Cornell U)

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Kaushik Basu

Abstract

The paper fully characterizes the Bertrand equilibria of oligopolistic markets where consumers may ignore the last (i.e. the right-most) digits of prices. Consumers, in this model, do not do this reflexively or out of irrationality, but only when they expect the time cost of acquiring full cognizance of the exact price to exceed the expected loss caused by the slightly erroneous amounts that would be purchased by virtue of ignoring the information concerning the last digits of prices. It is shown that in this setting there will always exist firms that set prices that end in nine though there may also be some (non-strict) equilibria where a non-nine price ending occurs. It is shown that all firms earn positive profits even in Bertrand equilibria. The model helps us understand in what kinds of markets we are most likely to encounter pricing in the 9's.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 04-04.

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Date of creation: Apr 2004
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Handle: RePEc:ecl:corcae:04-04

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Paper
- Kaushik Basu, 2004. "Consumer Cognition and Pricing in the 9's in Oligopolistic Markets," Harvard Institute of Economic Research Working Papers 2053, Harvard - Institute of Economic Research. [Downloadable!]

Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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Basu, Kaushik, 1988. "Strategic irrationality in extensive games," Mathematical Social Sciences, Elsevier, vol. 15(3), pages 247-260, June. [Downloadable!] (restricted)
Basu, Kaushik, 1997. "Why are so many goods priced to end in nine? And why this practice hurts the producers," Economics Letters, Elsevier, vol. 54(1), pages 41-44, January. [Downloadable!] (restricted)
Bradley J. Ruffle & Ze'ev Shtudiner, 2006. "99: are retailers best responding to rational consumers? Experimental evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(6), pages 459-475. [Downloadable!]

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