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 â€œnaiveâ€ 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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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 851.
Date of creation: 03 Dec 2006
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Sunk Cost Bias; Bertrand Oligopoly; Dynamic Learning;
Other versions of this item:
- Nabil Al-Najjar & Sandeep Baliga & David Besanko, 2005. "The Sunk Cost Bias and Managerial Pricing Practices," Levine's Bibliography 666156000000000496, UCLA Department of Economics.
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
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