The Sunk Cost Bias and Managerial Pricing Practices
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 â€œnaiveâ€ 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
(This abstract was borrowed from another version of this item.)
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Federico Echenique, 2002.
"Comparative Statics by Adaptive Dynamics and the Correspondence Principle,"
Econometric Society, vol. 70(2), pages 833-844, March.
- Federico Echenique, 1999. "Comparative Statics by Adaptative Dynamics and the Correspondence Principle," Documentos de Trabajo (working papers) 2099, Department of Economics - dECON.
- Federico Echenique., 2000. "Comparative Statics by Adaptive Dynamics and The Correspondence Principle," Economics Working Papers E00-273, University of California at Berkeley.
- Federico Echenique, 2000. "Comparative Statics by Adaptive Dynamics and The Correspondence Principle," Econometric Society World Congress 2000 Contributed Papers 1906, Econometric Society.
- Federico Echenique, 2000. "Comparative Statics by Adaptive Dynamics and The Correspondence Principle," GE, Growth, Math methods 9912002, EconWPA.
- Theo Offerman & Jan Potters, 2006. "Does Auctioning of Entry Licences Induce Collusion? An Experimental Study," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 769-791.
- Offerman, T.J.S. & Potters, J.J.M., 2006. "Does auctioning of entry licences induce collusions? An experimental study," Other publications TiSEM d72095fa-6c74-49a2-8c82-2, Tilburg University, School of Economics and Management.
- Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
- Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Smith, Vernon L, 1991. "Rational Choice: The Contrast between Economics and Psychology," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 877-897, August.
- Milgrom, Paul & Roberts, John, 1991. "Adaptive and sophisticated learning in normal form games," Games and Economic Behavior, Elsevier, vol. 3(1), pages 82-100, February.
- Samuelson, Larry, 2001. "Introduction to the Evolution of Preferences," Journal of Economic Theory, Elsevier, vol. 97(2), pages 225-230, April.
- Vives, Xavier, 1990. "Nash equilibrium with strategic complementarities," Journal of Mathematical Economics, Elsevier, vol. 19(3), pages 305-321.
- 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).
- Parayre, Roch, 1995. "The strategic implications of sunk costs: A behavioral perspective," Journal of Economic Behavior & Organization, Elsevier, vol. 28(3), pages 417-442, December.
- Friedman, James W. & Mezzetti, Claudio, 2001. "Learning in Games by Random Sampling," Journal of Economic Theory, Elsevier, vol. 98(1), pages 55-84, May.
- Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-1277, November.
- David A. Brown & Peter Booth & Francesco Giacobbe, 2004. "Technological and organizational influences on the adoption of activity-based costing in Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 44(3), pages 329-356.
- Aviad Heifetz & Chris Shannon & Yossi Spiegel, 2007. "The Dynamic Evolution of Preferences," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(2), pages 251-286, August.