The Sunk Cost Bias and Managerial Pricing Practices

Nabil Al-Najjar, Sandeep Baliga () and David Besanko

No 851, 2006 Meeting Papers from Society for Economic Dynamics

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

Keywords: Sunk Cost Bias; Bertrand Oligopoly; Dynamic Learning (search for similar items in EconPapers)
JEL-codes: D01 (search for similar items in EconPapers)
Date: 2006-12-03

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Working Paper: The Sunk Cost Bias and Managerial Pricing Practices (2005)
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