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Dynamic Pricing with Loss-Averse Consumers and Peak-End Anchoring

Author

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  • Javad Nasiry

    () (Information Systems, Business Statistics and Operations Management Department, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

  • Ioana Popescu

    () (Decision Sciences Area, INSEAD, 138676 Singapore, Republic of Singapore)

Abstract

We study the dynamic pricing implications of a new, behaviorally motivated reference price mechanism based on the peak-end memory mode. This model suggests that consumers anchor on a reference price that is a weighted average of the lowest and most recent prices. Loss-averse consumers are more sensitive to perceived losses than gains relative to this reference price. We find that a range of constant pricing policies is optimal for the corresponding dynamic pricing problem. This range is wider the more consumers anchor on lowest prices, and it persists when buyers are loss neutral, in contrast with previous literature. In a transient regime, the optimal pricing policy is monotone and converges to a steady-state price, which is lower the more extreme and salient the low-price anchor is. Our results suggest that behavioral regularities, such as peak-end anchoring and loss aversion, limit the benefits of varying prices, and caution that the adverse effects of deep discounts on the firm's optimal prices and profits might be more enduring than previous models predict.

Suggested Citation

  • Javad Nasiry & Ioana Popescu, 2011. "Dynamic Pricing with Loss-Averse Consumers and Peak-End Anchoring," Operations Research, INFORMS, vol. 59(6), pages 1361-1368, December.
  • Handle: RePEc:inm:oropre:v:59:y:2011:i:6:p:1361-1368
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    File URL: http://dx.doi.org/10.1287/opre.1110.0952
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    Citations

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    Cited by:

    1. Chenavaz, Régis, 2016. "Dynamic pricing with reference price dependence," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 10, pages 1-17.
    2. repec:taf:applec:v:49:y:2017:i:32:p:3156-3162 is not listed on IDEAS
    3. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2017. "A theory of price adjustment under loss aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 78-95.
    4. repec:kap:jincot:v:17:y:2017:i:3:d:10.1007_s10842-016-0238-8 is not listed on IDEAS
    5. Chenavaz, Régis & Paraschiv, Corina, 2018. "Dynamic pricing for inventories with reference price effects," Economics Discussion Papers 2018-50, Kiel Institute for the World Economy (IfW).
    6. repec:spr:jbecon:v:87:y:2017:i:6:d:10.1007_s11573-016-0839-z is not listed on IDEAS
    7. repec:eee:ejores:v:267:y:2018:i:3:p:944-957 is not listed on IDEAS
    8. Régis Chenavaz, 2017. "Dynamic quality policies with reference quality effects," Applied Economics, Taylor & Francis Journals, vol. 49(32), pages 3156-3162, July.
    9. Lihao Lu & Qinglong Gou & Wansheng Tang & Jianxiong Zhang, 2016. "Joint pricing and advertising strategy with reference price effect," International Journal of Production Research, Taylor & Francis Journals, vol. 54(17), pages 5250-5270, September.
    10. repec:spr:joecth:v:66:y:2018:i:1:d:10.1007_s00199-017-1055-y is not listed on IDEAS
    11. repec:eee:ejores:v:262:y:2017:i:1:p:136-150 is not listed on IDEAS

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