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Competitive strategy when consumers are affected by reference prices

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  • Azar, Ofer H.

Abstract

The article presents a model that analyzes the optimal strategy of multi-product firms when consumers are affected by reference prices. Generally, the stronger the consideration of reference prices is, the more intensified the competition is and the lower are the prices and profits. In some cases it becomes optimal to sell the good for which consideration of reference prices is stronger at a negative markup. The model offers several practical implications, for example, suggesting that firms should usually avoid focusing advertisements on the price differences between the firm and its competitors.

Suggested Citation

  • Azar, Ofer H., 2013. "Competitive strategy when consumers are affected by reference prices," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 327-340.
  • Handle: RePEc:eee:joepsy:v:39:y:2013:i:c:p:327-340
    DOI: 10.1016/j.joep.2013.09.008
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    References listed on IDEAS

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    Cited by:

    1. Fabrizi, Simona & Lippert, Steffen & Puppe, Clemens & Rosenkranz, Stephanie, 2016. "Manufacturer suggested retail prices, loss aversion and competition," Journal of Economic Psychology, Elsevier, vol. 53(C), pages 141-153.

    More about this item

    Keywords

    Behavioral economics; Reference prices; Multi-product firms; Competitive strategy; Loss leaders; Retailing;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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