Consumer bounded rationality and rigidity/flexibility retail price patterns
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.
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References listed on IDEAS
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- Peter J. Klenow & Benjamin A. Malin, 2010.
"Microeconomic Evidence on Price-Setting,"
NBER Working Papers
15826, National Bureau of Economic Research, Inc.
- Martin J. Osborne & Ariel Rubinstein, 1997.
"Games with Procedurally Rational Players,"
Department of Economics Working Papers
1997-02, McMaster University.
- Spiegler, Ran, 2014.
"Bounded Rationality and Industrial Organization,"
Oxford University Press, number 9780199334261, December.
- Spiegler, Ran, 2006.
"Competition over agents with boundedly rational expectations,"
Econometric Society, vol. 1(2), pages 207-231, June.
- Ran Spiegler, 2005. "Competition over Agents with Boundedly Rational Expectations," Levine's Bibliography 122247000000000535, UCLA Department of Economics.
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