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Shrinking Goods

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  • Levy, Daniel
  • Snir, Avichai

Abstract

If producers have more information than consumers about goods’ attributes, then they may use non-price (rather than price) adjustment mechanisms and, consequently, the market may reach a new equilibrium even if prices don't change. We study a situation where producers adjust the quantity per package rather than the price in response to changes in market conditions. Although consumers should be indifferent between equivalent changes in goods' prices and quantities, empirical evidence suggests that consumers often respond differently to price changes and equivalent quantity changes. We offer a possible explanation for this puzzle by constructing and empirically testing a model in which consumers incur cognitive costs when processing goods’ price and quantity information.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 46040.

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Date of creation: 22 Jan 2013
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Handle: RePEc:pra:mprapa:46040

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Keywords: Quantity Adjustment; Cognitive Costs of Attention; Information Processing;

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References

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  1. Michael Ehrmann, 2011. "Inflation Developments and Perceptions after the Euro Cash Changeover," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 12(1), pages 33-58, 02.
  2. Armstrong, Mark & Chen, Yongmin, 2007. "Inattentive Consumers and Product Quality," MPRA Paper 4797, University Library of Munich, Germany.
  3. Daniel Levy & Dongwon Lee & Haipeng Chen & Robert Kauffman & Mark Bergen, 2008. "Price Points and Price Rigidity," Emory Economics, Department of Economics, Emory University (Atlanta) 0809, Department of Economics, Emory University (Atlanta).
  4. Richard H. Thaler, 2000. "From Homo Economicus to Homo Sapiens," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 14(1), pages 133-141, Winter.
  5. Raajpoot, Nusser A. & Sharma, Arun & Chebat, Jean-Charles, 2008. "The role of gender and work status in shopping center patronage," Journal of Business Research, Elsevier, Elsevier, vol. 61(8), pages 825-833, August.
  6. Bagwell, Laurie Simon & Bernheim, B Douglas, 1996. "Veblen Effects in a Theory of Conspicuous Consumption," American Economic Review, American Economic Association, American Economic Association, vol. 86(3), pages 349-73, June.
  7. Levy, Daniel & Young, Andrew, 2004. "The Real Thing: Nominal Price Rigidity of the Nickel Coke, 1886–1959," MPRA Paper 1046, University Library of Munich, Germany.
  8. Edward S. Knotek, 2011. "Convenient Prices and Price Rigidity: Cross-Sectional Evidence," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 1076-1086, August.
  9. Levy, Daniel & Chen, Haipeng (Allan) & Ray, Sourav & Bergen, Mark, 2006. "Asymmetric Price Adjustment in the Small," MPRA Paper 1097, University Library of Munich, Germany.
  10. Peng, Lin & Xiong, Wei, 2006. "Investor attention, overconfidence and category learning," Journal of Financial Economics, Elsevier, Elsevier, vol. 80(3), pages 563-602, June.
  11. Swan, Peter L, 1970. "Market Structure and Technological Progress: The Influence of Monopoly on Product Innovation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(4), pages 627-38, November.
  12. Carlton, Dennis W, 1991. "The Theory of Allocation and Its Implications for Marketing and Industrial Structure: Why Rationing Is Efficient," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 34(2), pages 231-62, October.
  13. Warner, Elizabeth J & Barsky, Robert B, 1995. "The Timing and Magnitude of Retail Store Markdowns: Evidence from Weekends and Holidays," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(2), pages 321-52, May.
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Cited by:
  1. Avichai Snir & Daniel Levy & Alex Gotler & Haipeng (Allen) Chen, 2012. "Not All Price Endings are Created Equal: Price Points and Asymmetric Price Rigidity," Emory Economics, Department of Economics, Emory University (Atlanta) 1206, Department of Economics, Emory University (Atlanta).

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