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Behavioral Constraints on Pricing: Experimental Evidence on Price Discrimination and Customer Antagonism

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  • Andreas Leibbrandt

Abstract

In this study, we investigate behavioral constraints on pricing by using a novel laboratory experiment in which actual consumption goods are traded. We test different models and provide several insights into pricing and reactions to price discrimination. First, we identify the extent to which sellers voluntarily and strategically avoid price discrimination. Second, we find that sellers strategically overprice low value customers to avoid antagonizing high value customers. Third, we observe that customers are not generally antagonized by price discrimination: while they are less likely to buy if they are charged a higher price than another customer even if they are underpriced, they are more likely to buy if they are charged a lower price even if they are overpriced. These findings are consistent with a reference point model, which assumes that prices for other customers constitute reference points. Finally, we show that our findings hold regardless of whether sellers are monopolists or compete against other sellers. The observed behavioral patterns suggest a novel explanation for sticky prices and impulse purchase behavior.

Suggested Citation

  • Andreas Leibbrandt, 2016. "Behavioral Constraints on Pricing: Experimental Evidence on Price Discrimination and Customer Antagonism," CESifo Working Paper Series 6214, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6214
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    More about this item

    Keywords

    price discrimination; customer antagonism; fairness; reference points;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • C99 - Mathematical and Quantitative Methods - - Design of Experiments - - - Other

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