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

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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 is likely to be purchased or the slightly higher price that may be paid 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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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 2053.

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Date of creation: 2004
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Handle: RePEc:fth:harver:2053

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  1. Eric Anderson & Duncan Simester, 2003. "Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments," Quantitative Marketing and Economics, Springer, Springer, vol. 1(1), pages 93-110, March.
  2. Basu, Kaushik, 1997. "Why are so many goods priced to end in nine? And why this practice hurts the producers," Economics Letters, Elsevier, Elsevier, vol. 54(1), pages 41-44, January.
  3. Kaushik Basu, 2010. "Strategic Irrationality in Extensive Games," Levine's Working Paper Archive 375, David K. Levine.
  4. 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.
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Cited by:
  1. Bryan C. McCannon, 2009. "Multi-unit pricing," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(2), pages 135-140.

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