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The Sunk Cost Bias and Managerial Pricing Practices

Author

Listed:
  • Nabil Al-Najjar
  • Sandeep Baliga

    () (Northwestern University)

  • 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

Suggested Citation

  • Nabil Al-Najjar & Sandeep Baliga & David Besanko, 2006. "The Sunk Cost Bias and Managerial Pricing Practices," 2006 Meeting Papers 851, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:851
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    References listed on IDEAS

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    Cited by:

    1. David Kelsey & Frank Milne, 2008. "Imperfect Competition and Corporate Governance," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(6), pages 1115-1141, December.
    2. Buccirossi, Paolo & Spagnolo, Giancarlo, 2006. "Optimal Fines in the Era of Whistleblowers," CEPR Discussion Papers 5465, C.E.P.R. Discussion Papers.
    3. Gramlich, Jacob P. & Ray, Korok, 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.).

    More about this item

    Keywords

    Sunk Cost Bias; Bertrand Oligopoly; Dynamic Learning;

    JEL classification:

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

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