Overpredicting and Underprofiting in Pricing Decisions

Journal of Behavioral Decision Making, 2012

Rotman School of Management Working Paper No. 2763582

10 Pages Posted: 14 Apr 2016

See all articles by Luxi Shen

Luxi Shen

University of Chicago - Booth School of Business

Christopher K. Hsee

University of Chicago - Booth School of Business

Qingsheng Wu

Shanghai Jiao Tong University (SJTU)

Claire I. Tsai

University of Toronto - Joseph L. Rotman School of Management

Date Written: August 21, 2011

Abstract

This research examines sellers’ price-setting behavior and discovers a naturally occurring mismatch between sellers and buyers: Sellers who make a price decision often consider alternative prices and engage in the joint evaluation mode, whereas buyers who make a purchase decision see only the finally set price and are in the single evaluation mode. This mismatch in evaluation modes leads sellers to overpredict buyers’ price sensitivity and underprice their products. However, these effects apply only to products unfamiliar to buyers and without salient reference prices and can be alleviated if sellers are encouraged to mimic single evaluation when making pricing decisions. These propositions are empirically tested and verified.

Keywords: judgement and decision making; evaluability; joint evaluation; preference reversal; prediction error

Suggested Citation

Shen, Luxi and Hsee, Christopher K. and Wu, Qingsheng and Tsai, Claire I., Overpredicting and Underprofiting in Pricing Decisions (August 21, 2011). Journal of Behavioral Decision Making, 2012; Rotman School of Management Working Paper No. 2763582. Available at SSRN: https://ssrn.com/abstract=2763582

Luxi Shen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Christopher K. Hsee

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Qingsheng Wu

Shanghai Jiao Tong University (SJTU) ( email )

800 Dongchuan Rd
Minhang, Shanghai 200240
China

Claire I. Tsai

University of Toronto - Joseph L. Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416 946 3128 (Phone)
416 978 5433 (Fax)

HOME PAGE: http://www.rotman.utoronto.ca/facbios/viewFac.asp?facultyID=Claire.Tsai

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