On the Optimality of Mental Accounting

Jarrod Burgh, Emerson Melo and Matthew Shum

Papers from arXiv.org

Abstract: Mental accounting is usually explained by self-control, and two-stage budgeting by separable preferences. We propose a third explanation based on sellers' market power. A consumer who commits to spend a fixed number of dollars in a category has unit-elastic demand, so a seller in that category gains nothing by restricting quantity. A consumer who instead targets a fixed physical quantity has perfectly inelastic demand, a case that a monopolist can exploit. We characterize the commitments that remove a seller's incentive to mark up prices, and show that the fixed dollar budget is the least restrictive. We then show that what matters is budget rigidity rather than separability of preferences. A consumer who re-optimizes her category budget when prices change is insulated from market power only if categories are substitutes; a rigid budget insulates her in every case. Mental accounting can therefore be read as a commitment device against markups, a rationale that is separate from the self-control motive in the existing literature.

Date: 2026-10
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://arxiv.org/pdf/2610.12587 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2610.12587

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().