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Price dispersion and optimal price categories with limited memory consumers

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  • Omer F. Baris
  • Levent Kutlu

Abstract

In this paper, we study consumers with limited memory and examine the effects of their price categorization on the pricing strategies of competing firms. The valuations of consumers are assumed to be heterogeneous. We find that it is possible to observe price dispersion even when each firm charges a single price if the consumers categorize prices non†optimally. Moreover, we demonstrate that the likelihood of a price dispersion outcome is reduced when consumers with limited memory set up the price categories optimally. These findings suggest that the consumers' limited memory and their sub†optimal behavior, that is, their inability to choose price categories optimally can be a reason for observed price dispersion.

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  • Omer F. Baris & Levent Kutlu, 2018. "Price dispersion and optimal price categories with limited memory consumers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 39(1), pages 97-106, January.
  • Handle: RePEc:wly:mgtdec:v:39:y:2018:i:1:p:97-106
    DOI: 10.1002/mde.2872
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    Cited by:

    1. Levent Kutlu & Robin C. Sickles, 2017. "Measuring market power when firms price discriminate," Empirical Economics, Springer, vol. 53(1), pages 287-305, August.

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