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Consumer Cognition and Pricing in the 9's in Oligopolistic Markets


Kaushik Basu


Cornell University - Department of Economics; Harvard University - Harvard Institute of Economic Research; Institute for the Study of Labor (IZA); World Bank

December 2004

Harvard Institute of Economic Research Discussion Paper No. 2053

Abstract:     
The paper fully characterizes the Bertrand equilibria of oligopolistic markets where consumers may ignore the last (i.e. the right-most) digits of prices. Consumers, in this model, do not do this reflexively or out of irrationality, but only when they expect the time cost of acquiring full cognizance of the exact price to exceed the expected loss caused by the slightly erroneous amounts that is likely to be purchased or the slightly higher price that may be paid by virtue of ignoring the information concerning the last digits of prices.

It is shown that in this setting there will always exist firms that set prices that end in nine though there may also be some (non-strict) equilibria where a non-nine price ending occurs. It is shown that all firms earn positive profits even in Bertrand equilibria. The model helps us understand in what kinds of markets we are most likely to encounter pricing in the 9's.

Number of Pages in PDF File: 30

JEL Classification: D43, L13

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Date posted: December 14, 2004  

Suggested Citation

Basu, Kaushik, Consumer Cognition and Pricing in the 9's in Oligopolistic Markets (December 2004). Harvard Institute of Economic Research Discussion Paper No. 2053. Available at SSRN: http://ssrn.com/abstract=634722 or http://dx.doi.org/10.2139/ssrn.634722

Contact Information

Kaushik Basu (Contact Author)
Cornell University - Department of Economics ( email )
414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-2525 (Phone)
607-255-2818 (Fax)
Harvard University - Harvard Institute of Economic Research ( email )
Department of Economics
200 Littauer Center
Cambridge, MA 02138
United States
617-495-8161 (Phone)
617-495-8570 (Fax)
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
World Bank
1818 H Street NW
Washington, DC 20433
United States
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