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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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  • Nabil Al-Najjar & Sandeep Baliga & David Besanko, 2005. "The Sunk Cost Bias and Managerial Pricing Practices," Levine's Bibliography 666156000000000496, UCLA Department of Economics.
    • Handle: RePEc:cla:levrem:666156000000000496
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    File URL: http://www.kellogg.nwu.edu/faculty/baliga/htm/sunkcost.pdf
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    Cited by:

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    3. Spagnolo, Giancarlo & Buccirossi, Paolo, 2006. "Optimal Fines in the Era of Whistleblowers," CEPR Discussion Papers 5465, C.E.P.R. Discussion Papers.
    4. Jacob P. Gramlich & Korok Ray, 2015. "Reconciling Full-Cost and Marginal-Cost Pricing," Finance and Economics Discussion Series 2015-72, Board of Governors of the Federal Reserve System (U.S.).

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    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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