Hysteresis, Price Acceptance, and Reference Prices

Timothy J. Richards, Miguel Gomez and Iryna Printezis

American Journal of Agricultural Economics, 2016, vol. 98, issue 3, 679-706

Abstract: The existence of price thresholds in grocery retailing is well-documented. Most authors explain the existence of price thresholds using Assimilation-Contrast Theory, Adaptation Level Theory, or Prospect Theory. 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 suggest 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.

Date: 2016
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Working Paper: Hysteresis, Price Acceptance, and Reference Prices (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:ajagec:v:98:y:2016:i:3:p:679-706.

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