Regular prices and sales: Regular prices and sales
By Paul Heidhues, B. Kőszegi. 2010
145 citations recorded by the source corpus.
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.
Subfields: Economics and Econometrics, General Decision Sciences, Marketing
View Paper: https://www.semanticscholar.org/paper/c38c73813d38fe9fa4f91ffff7ae4f64170b9efc
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Citations in the corpus
- Expectations-Based Reference-Dependent Life-Cycle Consumption (2017, background): “As explained in detail by Heidhues and Koszegi (2008), flat consumption implies that beliefs about consumption are also flat, which generates non-differentiabilities in the agent’s maximization problem, renders the first-order condition inapplicable, and complicates the equilibrium-finding process.”
- Expectations as Endowments: Evidence on Reference-Dependent Preferences from Exchange and Valuation Experiments (2011, background): “Apart from distinguishing between different theories of reference point formation, our experi- 3The theoretical implications of expectation-based reference points for optimal pricing strategies are studied by Heidhues and Kőszegi (2008, 2010) and Herweg (2010).”