Heuristic Pricing in an Uncertain Market: Ecological and Constructivist Rationality
57 Pages Posted: 23 Mar 2017
Date Written: December 8, 2016
How do firms set prices when faced with an uncertain market? Analyzing the pricing strategies of used car dealers using online data and interviews, we find that dealers employ an aspiration level heuristic similar to a Dutch auction. At the same time, the aggregate market is well described by a model of equilibrium price dispersion. Unlike the equilibrium model, the heuristic correctly predicts systematic pricing characteristics such as high initial price, price stickiness, and the “cheap twin paradox.” We also find first evidence that heuristic pricing can generate higher profits given uncertainty than the equilibrium strategy.
Keywords: Pricing, Uncertainty, Bounded Rationality, Heuristics
JEL Classification: D22, D80, L81
Suggested Citation: Suggested Citation