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Consumer Reactions To Unobserved Changes in Price Schedules

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  • Peter Katuscak

Abstract

Economic theory presumes that individuals respond to true marginal prices when de- ciding on the amount of goods and services they buy and many other economic decisions. However, learning about these marginal prices is often costly in terms of search time, cog- nitive effort or monetary outlays. This is likely to be true of price changes in subscription plans. Consumers may therefore opt to be satisfied with only an approximate knowledge of the relevant marginal prices. This paper presents an experiment that studies repeated consumer purchase and price information updating and acquisition decisions when param- eters of the price schedule are serially correlated but unknown. Subjects have an option to acquire the pricing information at a cost, or otherwise just update their beliefs based on the observation of the total cost of purchase. We find the following: (1) conditional on information acquisition decisions, the model of Bayesian updating provides a good approx- imation for revealed mean beliefs about the per-unit price held by subjects who appear to understand the experiment and/or report their expected cost of purchase accurately; it is not a good approximation for other subjects; (2) the demand for information decreases with the cost of information, as expected; (3) controlling for Bayesian beliefs and cost of information, the demand for information does not vary with the length of the remaining time horizon in which the information can be used, contrary to the theoretical prediction; (4) large positive surprises in the cost of purchase in the most recent period increase infor- mation demand, whereas negative surprises decrease it, relative to the no-surprise baseline, which is contrary to the theoretical prediction.

Suggested Citation

  • Peter Katuscak, 2011. "Consumer Reactions To Unobserved Changes in Price Schedules," CERGE-EI Working Papers wp433, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp433
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    References listed on IDEAS

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    1. de Bartolome, Charles A. M., 1995. "Which tax rate do people use: Average or marginal?," Journal of Public Economics, Elsevier, vol. 56(1), pages 79-96, January.
    2. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
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    More about this item

    Keywords

    price scheme; complexity; consumer decisions;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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