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A behavioral model of consumer response to price information

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  • Pennesi, Daniele

Abstract

This paper introduces a model of choice that captures heuristics and reference dependence in consumers’ responses to price information. In the model, a product’s quality is positively distorted when its price is close to the reference price. The model is consistent with a kinked and upward-sloping demand curve. The price and cross-price elasticities of demand can be positive or negative, asymmetric, and product-dependent. The model provides an explanation for quality-dependent price stickiness, justifies the adoption of complex pricing strategies, and allows for the derivation of closed-form expressions for the optimal price and reference price set by a monopolist. The model is fully characterized by testable restrictions on demand data, offering a method for identifying the reference price.

Suggested Citation

  • Pennesi, Daniele, 2025. "A behavioral model of consumer response to price information," Journal of Economic Behavior & Organization, Elsevier, vol. 230(C).
    • Handle: RePEc:eee:jeborg:v:230:y:2025:i:c:s0167268124004864
    DOI: 10.1016/j.jebo.2024.106872
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    More about this item

    Keywords

    Reference price; Multinomial Logit; Price-quality heuristic; Pricing strategy; Price rigidity; Lambert W;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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