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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.

Suggested Citation

  • 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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    File URL: https://doi.org/10.1111/j.1530-9134.2006.00094.x
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    Cited by:

    1. Levy, Daniel & Lee, Dongwon & Chen, Haipeng (Allan) & Kauffman, Robert J. & Bergen, Mark, 2011. "Price Points and Price Rigidity," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 1417-1431.
    2. Ashton, John K. & Hudson, Robert S., 2008. "Interest rate clustering in UK financial services markets," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1393-1403, July.
    3. 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, ZBW - Leibniz Information Centre for Economics.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    13. 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.
    14. Yuxin Chen & Ganesh Iyer & Amit Pazgal, 2010. "Limited Memory, Categorization, and Competition," Marketing Science, INFORMS, vol. 29(4), pages 650-670, 07-08.
    15. 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.
    16. 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.
    17. repec:rim:rimwps:04-07 is not listed on IDEAS
    18. 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.

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