Pricing with bargain hunting consumers

Matthew Gentry and Martin Pesendorfer

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: A single-product retailer faces bargain hunting consumers whose willingness to pay incorporates sensations of gain and loss driven by differences between the observed price and prices they rationally expect in the spirit of Koszegi and Rabin (2006). We examine the Bayesian Nash equilibrium (non-commitment) pricing solution in which (i) the retailer maximizes profit given consumers' beliefs and (ii) consumers' beliefs are consistent with the retailer's choice. We show two novel results: First, a pure-strategy, uniform-price, equilibrium does not exist when consumers are bargain hunters who value gains more than losses. Second, in this case there exists a mixed strategy equilibrium and all mixed strategy equilibria involve the same retailer profit. The equilibrium retailer profit is (weakly) lower than in the absence of reference effects.

Keywords: bargain hunting; pricing; reference effects (search for similar items in EconPapers)
JEL-codes: J1 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2021-09-01
New Economics Papers: this item is included in nep-com, nep-gth, nep-mic and nep-reg
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Published in Games and Economic Behavior, 1, September, 2021, 129, pp. 549 - 569. ISSN: 0899-8256

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:111591

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