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Reference price distortion

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Author Info
Jozsef Sakovics ()

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Abstract

I show that when consumers (mis)perceive prices relative to reference prices, budgets turn out to be soft, prices tend to be lower and the average quality of goods sold decreases. These observations provide explanations for decentralized purchase decisions, for people being happy with a purchase even when they have paid their “valuation”, and for why trade might be detrimental to welfare.

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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 177.

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Length: 26
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:edn:esedps:177

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  1. Heidhues, Paul & Köszegi, Botond, 2005. "The Impact of Consumer Loss Aversion on Pricing," CEPR Discussion Papers 4849, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Paul Heidhues & Botond Koszegi, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-68, September. [Downloadable!]
  3. Thaler, Richard H, 1990. "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 193-205, Winter. [Downloadable!] (restricted)
  4. Heath, Chip & Soll, Jack B, 1996. " Mental Budgeting and Consumer Decisions," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 23(1), pages 40-52, June.
  5. Nobuhiro Kiyotaki & John Moore, 2004. "A Cost of Unified Currency," ESE Discussion Papers 119, Edinburgh School of Economics, University of Edinburgh.
  6. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Bolton, Gary E, 1991. "A Comparative Model of Bargaining: Theory and Evidence," American Economic Review, American Economic Association, vol. 81(5), pages 1096-136, December. [Downloadable!] (restricted)
  8. Deaton, Angus S, 1977. "Involuntary Saving through Unanticipated Inflation," American Economic Review, American Economic Association, vol. 67(5), pages 899-910, December. [Downloadable!] (restricted)
  9. Narayan Janakiraman & Robert J. Meyer & Andrea C. Morales, 2006. "Spillover Effects: How Consumers Respond to Unexpected Changes in Price and Quality," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 33(3), pages 361-369, October. [Downloadable!] (restricted)
  10. Thaler, Richard H & Shefrin, H M, 1981. "An Economic Theory of Self-Control," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 392-406, April. [Downloadable!] (restricted)
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  11. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November. [Downloadable!] (restricted)
  12. Graddy, Kathryn, 2006. "Art Auctions," Handbook of the Economics of Art and Culture, Elsevier. [Downloadable!] (restricted)
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