Altruistic Dynamic Pricing with Customer Regret
48 Pages Posted: 3 May 2009 Last revised: 26 Oct 2022
Date Written: April 2009
Abstract
A model is considered where firms internalize the regret costs that consumers experience when they see an unexpected price change. Regret costs are assumed to be increasing in the size of price changes and this can explain why the size of price increases is less sensitive to inflation than in models with fixed costs of changing prices. The latter predict unrealistically large responses of price changes to inflation for firms that do not frequently reduce their prices. Adjustment costs that depend on the size of price changes also raise the variability on the size of price increases. Lastly, it is argued that the common practice of announcing price increases in advance is much easier to rationalize with regret concerns by consumers than with more standard approaches to price rigidity.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Inflation Dynamics: A Structural Econometric Analysis
By Jordi Galí and Mark Gertler
-
Some Evidence on the Importance of Sticky Prices
By Mark Bils and Peter J. Klenow
-
Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve
By N. Gregory Mankiw and Ricardo Reis
-
Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve
By N. Gregory Mankiw and Ricardo Reis
-
By Varadarajan V. Chari, Patrick J. Kehoe, ...
-
Real Rigidities and the Non-Neutrality of Money
By Laurence Ball and David H. Romer
-
By Jordi Galí, Mark Gertler, ...
-
Control of the Public Debt: A Requirement for Price Stability?