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The Sunk Cost Bias and Managerial Pricing Practices

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  • Nabil Al-Najjar
  • Sandeep Baliga
  • David Besanko

Abstract

This paper provides an explanation for why the sunk cost bias persists among firms in a competitive environment in which rich learning possibilities are allowed. We envision firms that experiment with cost methodologies that are consistent with real-world accounting practices, including ones that confuse the relevance of variable, fixed, and sunk coststo pricing decisions. Firms follow “naive†adaptive learning to adjust prices and reinforcement learning to modify their costing methodologies. Costing and pricing practices that increase profits are reinforced. We show that all firms eventually display the sunk cost bias in their pricing behavior

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File URL: http://www.kellogg.nwu.edu/faculty/baliga/htm/sunkcost.pdf
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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 666156000000000496.

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Date of creation: 29 Mar 2005
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Handle: RePEc:cla:levrem:666156000000000496
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Find related papers by JEL classification:
  • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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  7. Friedman, James W. & Mezzetti, Claudio, 2001. "Learning in Games by Random Sampling," Journal of Economic Theory, Elsevier, vol. 98(1), pages 55-84, May.
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  10. Vives, X., 1988. "Nash Equilibrium With Strategic Complementarities," UFAE and IAE Working Papers 107-88, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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Cited by:

  1. Buccirossi, Paolo & Spagnolo, Giancarlo, 2006. "Optimal Fines in the Era of Whistleblowers," CEPR Discussion Papers 5465, C.E.P.R. Discussion Papers.
  2. Frank Milne & David Kelsey, 2006. "Imperfect Competition and Corporate Governance," Working Papers 1079, Queen's University, Department of Economics.

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