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Price lower and then higher or price higher and then lower?

  • Sitzia, Stefania
  • Zizzo, Daniel John

The paper presents an experiment testing the hypothesis that, if consumers’ valuation of a product is shaped by past experiences of prices, it may be more profitable for firms to follow the opposite strategy of pricing higher and then lower. We ran an individual choice experiment with a posted offer market setup, where different dynamic pricing strategies were implemented. Anchoring to the past two prices under simple rules can describe the behavior of 3 out of 4 subjects. We find evidence of preference shaping and the profitability of a ‘high low’ pricing strategy under a wide range of assumptions.

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Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 33 (2012)
Issue (Month): 6 ()
Pages: 1084-1099

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Handle: RePEc:eee:joepsy:v:33:y:2012:i:6:p:1084-1099
Contact details of provider: Web page: http://www.elsevier.com/locate/joep

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  1. Trichy V. Krishnan & Frank M. Bass & Dipak C. Jain, 1999. "Optimal Pricing Strategy for New Products," Management Science, INFORMS, vol. 45(12), pages 1650-1663, December.
  2. Loomes, Graham & Chris Starmer & Robert Sugden, 2002. "Do Anomalies Disappear in Repeated Markets?," Royal Economic Society Annual Conference 2002 132, Royal Economic Society.
  3. Fabio Tufano, 2010. "Are ‘true’ preferences revealed in repeated markets? An experimental demonstration of context-dependent valuations," Experimental Economics, Springer, vol. 13(1), pages 1-13, March.
  4. Bass, Frank M, 1980. "The Relationship between Diffusion Rates, Experience Curves, and Demand Elasticities for Consumer Durable Technological Innovations," The Journal of Business, University of Chicago Press, vol. 53(3), pages S51-67, July.
  5. Conlisk, John & Gerstner, Eitan & Sobel, Joel, 1984. "Cyclic Pricing by a Durable Goods Monopolist," The Quarterly Journal of Economics, MIT Press, vol. 99(3), pages 489-505, August.
  6. Dan Ariely & George Loewenstein & Drazen Prelec, 2003. ""Coherent Arbitrariness": Stable Demand Curves Without Stable Preferences," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 73-105, February.
  7. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
  8. Stefania Sitzia & Daniel Zizzo, 2011. "Does product complexity matter for competition in experimental retail markets?," Theory and Decision, Springer, vol. 70(1), pages 65-82, January.
  9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  10. Kyle Bagwell, 1987. "Introductory Price as a Signal of Cost in a Model of Repeat Business," Discussion Papers 722, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Daniel S. Putler, 1992. "Incorporating Reference Price Effects into a Theory of Consumer Choice," Marketing Science, INFORMS, vol. 11(3), pages 287-309.
  12. Schlee, Edward E., 2001. "Buyer experimentation and introductory pricing," Journal of Economic Behavior & Organization, Elsevier, vol. 44(3), pages 347-362, March.
  13. Andrea Isoni, 2011. "The willingness-to-accept/willingness-to-pay disparity in repeated markets: loss aversion or ‘bad-deal’ aversion?," Theory and Decision, Springer, vol. 71(3), pages 409-430, September.
  14. Lichtenstein, Donald R & Bearden, William O, 1989. " Contextual Influences on Perceptions of Merchant-Supplied Reference Prices," Journal of Consumer Research, University of Chicago Press, vol. 16(1), pages 55-66, June.
  15. Chapman, Gretchen B. & Johnson, Eric J., 1999. "Anchoring, Activation, and the Construction of Values, , , , , ," Organizational Behavior and Human Decision Processes, Elsevier, vol. 79(2), pages 115-153, August.
  16. Hilty, John A. & Carnevale, Peter J., 1993. "Black-Hat/White-Hat Strategy in Bilateral Negotiation," Organizational Behavior and Human Decision Processes, Elsevier, vol. 55(3), pages 444-469, August.
  17. Bateman, Ian J, et al, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 479-505, May.
  18. Sugden, Robert & Zheng, Jiwei & Zizzo, Daniel John, 2013. "Not all anchors are created equal," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 21-31.
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