Price Low and then Price High or Price High and then Price Low?

Abstract

The paper presents an experiment testing the hypothesis that, if consumers do not have well defined preferences and as a result their valuation of a new product is shaped by past experiences of prices, it may be more profitable for firms to follow the opposite strategy of pricing high and then lower. We ran an individual choice experiment with a posted offer market setup, where different dynamic pricing strategies were implemented. We find evidence of preference shaping and the profitability of a ‘high low’ pricing strategy under a wide range of assumptions.

Keywords: consumer market, dynamic price strategies, shaping effects, bounded rationality

JEL Classification: C91, D03, D12, D21, L11