Altruistic Dynamic Pricing with Customer Regret

27 Pages Posted: 19 Dec 2010

See all articles by Julio J. Rotemberg

Julio J. Rotemberg

Harvard University, Business, Government and the International Economy Unit (deceased); National Bureau of Economic Research (NBER) (deceased)

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Abstract

A model is considered in which firms internalize the costly regret that consumers experience when prices change unexpectedly. This regret is greater when prices change by more, and this can explain why the actual size of price increases for firms with rigid prices is less sensitive to inflation than in models with fixed costs of changing prices. Regret costs of this form also lead to more variable price changes than fixed costs do. Last, the practice of announcing price increases in advance is easier to rationalize with regret concerns by consumers than with more standard approaches to price rigidity.

Keywords: Rigid prices, regret, inflation, price pre-announcements

JEL Classification: L31, L11, D11

Suggested Citation

Rotemberg, Julio J., Altruistic Dynamic Pricing with Customer Regret. Scandinavian Journal of Economics, Vol. 112, No. 4, pp. 646-672, 2010. Available at SSRN: https://ssrn.com/abstract=1727886 or http://dx.doi.org/10.1111/j.1467-9442.2010.01620.x

Julio J. Rotemberg (Contact Author)

Harvard University, Business, Government and the International Economy Unit (deceased) ( email )

Cambridge, MA
United States
617-495-1015 (Phone)
617-496-5994 (Fax)

National Bureau of Economic Research (NBER) (deceased)

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Cambridge, MA 02138
United States

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