Regular Prices and Sales

68 Pages Posted: 24 Nov 2010

See all articles by Paul Heidhues

Paul Heidhues

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

Botond Koszegi

University of Bonn - Department of Economics

Date Written: November 22, 2010

Abstract

We study the properties of a profit-maximizing monopolist's optimal price distribution when selling to a loss-averse consumer, where (following Kőszegi 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

JEL Classification: D11, D43, D81, L13

Suggested Citation

Heidhues, Paul and Koszegi, Botond, Regular Prices and Sales (November 22, 2010). ESMT Working Paper No. 10-008, Available at SSRN: https://ssrn.com/abstract=1713080 or http://dx.doi.org/10.2139/ssrn.1713080

Paul Heidhues (Contact Author)

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany

Botond Koszegi

University of Bonn - Department of Economics ( email )

Bonn
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
126
Abstract Views
1,739
Rank
404,654
PlumX Metrics