Hysteresis, Price Acceptance, and Reference Prices

Timothy J. Richards, Miguel Gomez and Iryna Printezis

No 164872, 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota from Agricultural and Applied Economics Association

Abstract: The existence of price thresholds in grocery retailing is well-documented. Most authors explain the existence of price thresholds using Assimilation-Contrast Theory (ACT), Adaptation Level Theory (ALT) or Prospect Theory (PT). However, each of these theories is untenable if consumers are believed to behave rationally. We offer a theoretical explanation grounded in Real Options Theory (ROT) and economic hysteresis. We test the ROT hypothesis against three plausible alternatives using a maximum likelihood friction model that we augment for unobserved heterogeneity. Our findings support the ROT hypothesis, and suggests that the existence of price thresholds in aggregate data are driven by a common recognition of real option values, which do not disappear with the inclusion of consumer heterogeneity.

Keywords: Agribusiness; Agricultural and Food Policy; Consumer/Household Economics; Demand and Price Analysis; Industrial Organization (search for similar items in EconPapers)
Pages: 48
Date: 2014
New Economics Papers: this item is included in nep-agr
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Journal Article: Hysteresis, Price Acceptance, and Reference Prices (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea14:164872

DOI: 10.22004/ag.econ.164872

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