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Consumer bounded rationality and rigidity/flexibility retail price patterns

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  • Spiegler, Ran

Abstract

I revisit the model of market competition with boundedly rational consumers due to Spiegler (2006), in which firms compete in price distributions and consumers use a naive sampling procedure to evaluate them. I assume that firms can assign weight to arbitrarily low prices, and consumers have a non-trivial ex ante outside option. In symmetric Nash equilibrium, firms charge a high “regular price” with positive probability, and in addition randomize continuously over an interval of “sale” prices that are bounded away from the regular price. Sales become less frequent but more drastic as the number of competitors increases and as the consumer’s outside option becomes more attractive.

Suggested Citation

  • Spiegler, Ran, 2012. "Consumer bounded rationality and rigidity/flexibility retail price patterns," Economics Letters, Elsevier, vol. 116(3), pages 335-338.
  • Handle: RePEc:eee:ecolet:v:116:y:2012:i:3:p:335-338
    DOI: 10.1016/j.econlet.2012.04.003
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    References listed on IDEAS

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    1. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261.
    2. Osborne, Martin J & Rubinstein, Ariel, 1998. "Games with Procedurally Rational Players," American Economic Review, American Economic Association, vol. 88(4), pages 834-847, September.
    3. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284 Elsevier.
    4. Spiegler, Ran, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 1(2), pages 207-231, June.
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    Cited by:

    1. Kfir Eliaz & Ran Spiegler, 2015. "Beyond “Ellison’s Matrix”: New Directions in Behavioral Industrial Organization," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 259-272, November.

    More about this item

    Keywords

    Bounded rationality; Industrial organization; Sales; Regular prices; Price rigidity; Sampling;

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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