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Consumer Cognition and Pricing in the Nines 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 are 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 (nonstrict) 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 nines.

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  • Kaushik Basu, 2006. "Consumer Cognition and Pricing in the Nines in Oligopolistic Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 125-141, March.
  • Handle: RePEc:bla:jemstr:v:15:y:2006:i:1:p:125-141
    DOI: 10.1111/j.1530-9134.2006.00094.x
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    Cited by:

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    2. Levy, Daniel & Snir, Avichai & Gotler, Alex & Chen, Haipeng (Allan), 2020. "Not all price endings are created equal: Price points and asymmetric price rigidity," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics.
    3. Cardella, Eric & Seiler, Michael J., 2016. "The effect of listing price strategy on real estate negotiations: An experimental study," Journal of Economic Psychology, Elsevier, vol. 52(C), pages 71-90.
    4. Daniel Levy & Dongwon Lee & Haipeng (Allan) Chen & Robert J. Kauffman & Mark Bergen, 2011. "Price Points and Price Rigidity," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1417-1431, November.
    5. David Demery & Nigel W. Duck, 2007. "Two plus two equals six: an alternative explanation of why so many goods prices end in nine," Bristol Economics Discussion Papers 07/598, School of Economics, University of Bristol, UK.
    6. Nicola Lacetera & Devin G. Pope & Justin R. Sydnor, 2012. "Heuristic Thinking and Limited Attention in the Car Market," American Economic Review, American Economic Association, vol. 102(5), pages 2206-2236, August.
    7. Levent Kutlu, 2015. "Limited Memory Consumers and Price Dispersion," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 46(4), pages 349-357, June.
    8. Quinn Keefer & Galib Rustamov, 2018. "Limited attention in residential energy markets: a regression discontinuity approach," Empirical Economics, Springer, vol. 55(3), pages 993-1017, November.
    9. Yuxin Chen & Ganesh Iyer & Amit Pazgal, 2010. "Limited Memory, Categorization, and Competition," Marketing Science, INFORMS, vol. 29(4), pages 650-670, 07-08.
    10. Bronson Argyle & Taylor D. Nadauld & Christopher Palmer, 2019. "Monthly Payment Targeting and the Demand for Maturity," NBER Working Papers 25668, National Bureau of Economic Research, Inc.
    11. Hackl, Franz & Kummer, Michael E. & Winter-Ebmer, Rudolf, 2014. "99 Cent: Price points in e-commerce," Information Economics and Policy, Elsevier, vol. 26(C), pages 12-27.
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    13. Alexei Alexandrov, 2016. "Competing for Consumers with Self‐Control Problems," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(1), pages 179-194, March.
    14. Antonio Filippin, 2013. "The Effect of .99 Price Endings on Consumer Demand: An Example of Confounding Factors Surviving in Field Experiments," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 9(2), pages 211-229, July.
    15. Eric Cardella & Michael J. Seiler, 2016. "The Effect of Listing Price Strategy on Real Estate Negotiations: An Experimental Study," Framed Field Experiments 00623, The Field Experiments Website.
    16. Marcial López-Pastor & Jesús García-Madariaga & Joaquín Sánchez & Jose Figueiredo, 2020. "Demand Impact for Prices Ending with “9” and “0” in Online and Offline Consumer Goods Retail Trade Channels," International Review of Management and Marketing, Econjournals, vol. 10(6), pages 58-78.
    17. Diwas Singh KC, 2020. "Heuristic Thinking in Patient Care," Management Science, INFORMS, vol. 66(6), pages 2545-2563, June.
    18. Ater, Itai & Gerlitz, Omri, 2017. "Round prices and price rigidity: Evidence from outlawing odd prices," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 188-203.
    19. Gallice, Andrea, 2010. "The neglected effects of demand characteristics on the sustainability of collusion," Research in Economics, Elsevier, vol. 64(4), pages 240-246, December.
    20. Antonio FILIPPIN, 2009. "A field experiment on the effect of .99 price endings," Departmental Working Papers 2009-26, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    21. Manoj Thomas & Daniel H. Simon & Vrinda Kadiyali, 2010. "The Price Precision Effect: Evidence from Laboratory and Market Data," Marketing Science, INFORMS, vol. 29(1), pages 175-190, 01-02.

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