The Role of Price Endings: Why Stores May Sell More at $49 than at $44
29 Pages Posted: 3 Aug 2000
Date Written: May 2000
Economists typically assume that demand curves are downward sloping. We present evidence that increasing the price of an item from $44 to $49 may increase unit demand by up to 30%. This effect is substantial, has broad application, is easily replicated, and contradicts the downward-sloping property of demand functions. The paper offers a rational-actor explanation for the effect by arguing that price endings may serve an informational role, signaling to customers which prices are low compared to other market prices. In equilibrium customer reliance on price endings is consistent with optimal firm behavior. We explain why firms prefer to use $9 endings on items with low (relative) prices. As a result, $9 price endings lead to more favorable customer price perceptions and increased customer demand. Retailers face a trade-off that regulates how many $9 endings they use. The effect is moderated by proliferation, so that the demand increase is smaller when more products have 9-digit endings. Predictions from the model are tested in three randomized field tests that measure the purchasing behavior of actual customers in two mail order catalogs. Together, the model and data yield three conclusions. First, using a $9 price ending on a product increases demand for that product. Second, $9 endings have a smaller effect when more products have them. Third, the $9 ending effect is further moderated when sale signs also inform customers about relative price levels. A corollary of the second conclusion is that firm profits are concave in the number of items that have $9 endings, and it is this concavity that makes use of $9 endings self-regulating.
JEL Classification: D11, D12, C70, D00, D82, D83, D84, M31
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