The Information Content of Prices: A Preliminary Model for Estimating Buyer Response

Kent B. Monroe
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Kent B. Monroe: University of Massachusetts

Management Science, 1971, vol. 17, issue 8, B519-B532

Abstract: An understanding of buyer response to price depends upon determining how buyers perceive price. One hypothesis is buyers have an acceptable range of prices and, therefore, the demand curve is backward bending. This article presents an a priori argument for a new research methodology for estimating buyers' responses to price. Two concepts are introduced to aid the development of the model. The potential applicability of the Weber-Fechner Law of psychophysics for exploring the price-quality relationship is analyzed and provides the basis of the argument that the demand function can be represented logarithmically. Given the desire to express demand as a logarithmic function of price, the lognormal distribution is used to explore the ramifications of the relationship. Finally, the method of profit analysis is developed for obtaining demand estimates.

Date: 1971
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