Failing to Choose the Best Price: Theory, Evidence, and Policy

Michael Grubb

No 878, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Both the "law of one price" and Bertrand's (1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and then show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons diffcult and soften competition. Possible regulatory interventions include simplifying the choice environment, for instance by restricting price to be a scalar, advising consumers of their expected costs under each option, or choosing on behalf of consumers.

Keywords: behavioral industrial organization; bounded rationality; search; obfuscation; switching; inertia (search for similar items in EconPapers)
JEL-codes: D43 D83 L11 L13 L15 (search for similar items in EconPapers)
Date: 2015-05-18
New Economics Papers: this item is included in nep-com, nep-ind and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (73)

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Journal Article: Failing to Choose the Best Price: Theory, Evidence, and Policy (2015)
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