A behavioral model of consumer response to price information

Daniele Pennesi

Journal of Economic Behavior & Organization, 2025, vol. 230, issue C

Abstract: This paper introduces a model of choice that captures heuristics and reference dependence in consumers’ responses to price information. In the model, a product’s quality is positively distorted when its price is close to the reference price. The model is consistent with a kinked and upward-sloping demand curve. The price and cross-price elasticities of demand can be positive or negative, asymmetric, and product-dependent. The model provides an explanation for quality-dependent price stickiness, justifies the adoption of complex pricing strategies, and allows for the derivation of closed-form expressions for the optimal price and reference price set by a monopolist. The model is fully characterized by testable restrictions on demand data, offering a method for identifying the reference price.

Keywords: Reference price; Multinomial Logit; Price-quality heuristic; Pricing strategy; Price rigidity; Lambert W (search for similar items in EconPapers)
JEL-codes: D01 D11 D91 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:230:y:2025:i:c:s0167268124004864

DOI: 10.1016/j.jebo.2024.106872

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