Regular prices and sales

Paul Heidhues and Botond Koszegi
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Paul Heidhues: ESMT European School of Management and Technology

No ESMT-10-008, ESMT Research Working Papers from ESMT European School of Management and Technology

Abstract: We study the properties of a profit-maximizing monopolist's optimal price distribution when selling to a loss-averse consumer, where (following Koszegi and Rabin (2006)) we assume that the consumer's reference point is her recent rational expectations about the purchase. If it is close to costless for the consumer to observe the realized price of the product, then – in a pattern consistent with several recently documented facts regarding supermarket pricing – the monopolist chooses low and variable “sale” prices with some probability and a high and sticky “regular” price with the complementary probability. Realizing that she will buy at the sale prices and hence that she will purchase with positive probability, the consumer chooses to avoid the painful uncertainty in whether she will get the product by buying also at the regular price. If it is more costly for the consumer to observe the realized price, then – in a pattern consistent with the pricing behavior of some other retailers (e.g. movie theaters) – the monopolist chooses a sticky price and holds no sales. In this case, a sale is less tempting and hence less effective in generating an expectation to purchase with positive probability. We also show that ex-ante competition for loyal consumers leads to sticky pricing while ex-post competition leads to marginal-cost pricing, and discuss several other extensions of the model.

Keywords: reference-dependent utility; gain-loss utility; loss aversion; sticky prices; sales; supermarket pricing (search for similar items in EconPapers)
JEL-codes: D11 D43 D81 L13 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2010-11-22
New Economics Papers: this item is included in nep-bec, nep-com and nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published in Theoretical Economics 9(1): 217–251.

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http://static.esmt.org/publications/workingpapers/ESMT-10-008.pdf First version, 2010 (application/pdf)

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Journal Article: Regular prices and sales (2014)
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