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Consumer Cognition and Pricing in the 9's in Oligopolistic Markets

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  • Kaushik Basu

Abstract

The paper fully characterizes the Bertrand equilibria of oligopolistic markets where consumers may ignore the last (i. e. the right-most) digits of prices. Consumers, in this model, do not do this reflexively or out of irrationality, but only when they expect the time cost of acquiring full cognizance of the exact price to exceed the expected loss caused by the slightly erroneous amounts that is likely to be purchased or the slightly higher price that may be paid by virtue of ignoring the information concerning the last digits of prices. It is shown that in this setting there will always exist firms that set prices that end in nine though there may also be some (non-strict) equilibria where a non-nine price ending occurs. It is shown that all firms earn positive profits even in Bertrand equilibria. The model helps us understand in what kinds of markets we are most likely to encounter pricing in the 9’s.

Suggested Citation

  • Kaushik Basu, 2004. "Consumer Cognition and Pricing in the 9's in Oligopolistic Markets," Harvard Institute of Economic Research Working Papers 2053, Harvard - Institute of Economic Research.
  • Handle: RePEc:fth:harver:2053
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    References listed on IDEAS

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    1. Basu, Kaushik, 1988. "Strategic irrationality in extensive games," Mathematical Social Sciences, Elsevier, vol. 15(3), pages 247-260, June.
    2. Eric Anderson & Duncan Simester, 2003. "Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments," Quantitative Marketing and Economics (QME), Springer, vol. 1(1), pages 93-110, March.
    3. Bradley J. Ruffle & Ze'ev Shtudiner, 2006. "99: are retailers best responding to rational consumers? Experimental evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(6), pages 459-475.
    4. Basu, Kaushik, 1997. "Why are so many goods priced to end in nine? And why this practice hurts the producers," Economics Letters, Elsevier, vol. 54(1), pages 41-44, January.
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    Cited by:

    1. Bryan C. McCannon, 2009. "Multi-unit pricing," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(2), pages 135-140.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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