Altruistic Dynamic Pricing with Customer Regret

Julio Rotemberg ()

No 14933, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A model is considered where firms internalize the regret costs that consumers experience when they see an unexpected price change. Regret costs are assumed to be increasing in the size of price changes and this can explain why the size of price increases is less sensitive to inflation than in models with fixed costs of changing prices. The latter predict unrealistically large responses of price changes to inflation for firms that do not frequently reduce their prices. Adjustment costs that depend on the size of price changes also raise the variability on the size of price increases. Lastly, it is argued that the common practice of announcing price increases in advance is much easier to rationalize with regret concerns by consumers than with more standard approaches to price rigidity.

JEL-codes: D11 E31 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba
Date: 2009-04
Note: EFG ME
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