Reference distorted prices

József Sákovics

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: I show that when consumers (mis)perceive prices relative to reference prices, budgets turn out to be soft, prices tend to be lower and the average quality of goods sold decreases. These observations provide explanations for decentralized purchase decisions, for people being happy with a purchase even when they have paid their "valuation", and for why trade might affect high quality local firms "unfairly".

Pages: 35
Date: 2011-05
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