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Reference distorted prices

I show that when consumers (mis)perceive prices relative to reference prices, budgets turn out to be soft, prices tend to be lower and the average quality of goods sold decreases. These observations provide explanations for decentralized purchase decisions, for people being happy with a purchase even when they have paid their "valuation", and for why trade might affect high quality local firms "unfairly".

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File URL: http://www.econ.ed.ac.uk/papers/id203_esedps.pdf
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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 203.

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Length: 35
Date of creation: 09 May 2011
Date of revision:
Handle: RePEc:edn:esedps:203
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  1. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  2. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc.
  3. Gurumurthy Kalyanaram & Russell S. Winer, 1995. "Empirical Generalizations from Reference Price Research," Marketing Science, INFORMS, vol. 14(3_supplem), pages G161-G169.
  4. David R. Bell & James M. Lattin, 2000. "Looking for Loss Aversion in Scanner Panel Data: The Confounding Effect of Price Response Heterogeneity," Marketing Science, INFORMS, vol. 19(2), pages 185-200, May.
  5. Deaton, Angus S, 1977. "Involuntary Saving through Unanticipated Inflation," American Economic Review, American Economic Association, vol. 67(5), pages 899-910, December.
  6. Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1133-1165, November.
  7. Heidhues, Paul & Köszegi, Botond, 2005. "The Impact of Consumer Loss Aversion on Pricing," CEPR Discussion Papers 4849, C.E.P.R. Discussion Papers.
  8. Briesch, Richard A, et al, 1997. " A Comparative Analysis of Reference Price Models," Journal of Consumer Research, University of Chicago Press, vol. 24(2), pages 202-14, September.
  9. Daniel S. Putler, 1992. "Incorporating Reference Price Effects into a Theory of Consumer Choice," Marketing Science, INFORMS, vol. 11(3), pages 287-309.
  10. Winer, Russell S, 1986. " A Reference Price Model of Brand Choice for Frequently Purchased Products," Journal of Consumer Research, University of Chicago Press, vol. 13(2), pages 250-56, September.
  11. Narayan Janakiraman & Robert J. Meyer & Andrea C. Morales, 2006. "Spillover Effects: How Consumers Respond to Unexpected Changes in Price and Quality," Journal of Consumer Research, University of Chicago Press, vol. 33(3), pages 361-369, October.
  12. G. Bolton, 2010. "A comparative model of bargaining: theory and evidence," Levine's Working Paper Archive 263, David K. Levine.
  13. Heath, Chip & Soll, Jack B, 1996. " Mental Budgeting and Consumer Decisions," Journal of Consumer Research, University of Chicago Press, vol. 23(1), pages 40-52, June.
  14. H. M. Shefrin & Richard Thaler, 1977. "An Economic Theory of Self-Control," NBER Working Papers 0208, National Bureau of Economic Research, Inc.
  15. Niedrich, Ronald W & Sharma, Subhash & Wedell, Douglas H, 2001. " Reference Price and Price Perceptions: A Comparison of Alternative Models," Journal of Consumer Research, University of Chicago Press, vol. 28(3), pages 339-54, December.
  16. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-68, September.
  17. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February.
  18. Bruce G. S. Hardie & Eric J. Johnson & Peter S. Fader, 1993. "Modeling Loss Aversion and Reference Dependence Effects on Brand Choice," Marketing Science, INFORMS, vol. 12(4), pages 378-394.
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