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

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  • Sitzia, Stefania
  • Zizzo, Daniel John

Abstract

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.

Suggested Citation

  • Sitzia, Stefania & Zizzo, Daniel John, 2012. "Price lower and then higher or price higher and then lower?," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1084-1099.
    • Handle: RePEc:eee:joepsy:v:33:y:2012:i:6:p:1084-1099
    DOI: 10.1016/j.joep.2012.07.006
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    References listed on IDEAS

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    Cited by:

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    2. Vittorio Pelligra & Tommaso Reggiani & Daniel John Zizzo, 2020. "Responding to (un)reasonable requests by an authority," Theory and Decision, Springer, vol. 89(3), pages 287-311, October.
    3. Chui, Peter M.W. & Fong, Lawrence Hoc Nang & Ren, Jinjuan & Tam, Lewis H.K., 2022. "Anchoring effects in repeated auctions of homogeneous objects: Evidence from Macao," Journal of Economic Psychology, Elsevier, vol. 90(C).
    4. Pelligra, Vittorio & Reggiani, Tommaso G. & Zizzo, Daniel John, 2016. "Responding to (Un)Reasonable Requests," IZA Discussion Papers 10189, Institute of Labor Economics (IZA).
    5. Jose A Martínez, 2016. "The magic of ‘great’ linked to product names," Journal of Brand Management, Palgrave Macmillan, vol. 23(2), pages 179-196, March.
    6. Viglia, Giampaolo & Abrate, Graziano, 2014. "How social comparison influences reference price formation in a service context," Journal of Economic Psychology, Elsevier, vol. 45(C), pages 168-180.
    7. Enrica Carbone & Vinayak V. Dixit & E. Elisabet Rutstrom, 2022. "Should I stay or should I go? Congestion pricing and equilibrium selection in a transportation network," Theory and Decision, Springer, vol. 93(3), pages 535-562, October.

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    More about this item

    Keywords

    Consumer market; Dynamic price strategies; Shaping effects; Anchoring; Within-context rules; 2340; 2343; 2360; 3920; 3940;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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