Heuristic Pricing in an Uncertain Market: Ecological and Constructivist Rationality

57 Pages Posted: 23 Mar 2017

See all articles by Florian M. Artinger

Florian M. Artinger

Max Planck Institute for Human Development

Gerd Gigerenzer

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Human Development

Date Written: December 8, 2016

Abstract

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

Artinger, Florian M. and Gigerenzer, Gerd, Heuristic Pricing in an Uncertain Market: Ecological and Constructivist Rationality (December 8, 2016). Available at SSRN: https://ssrn.com/abstract=2938702 or http://dx.doi.org/10.2139/ssrn.2938702

Florian M. Artinger (Contact Author)

Max Planck Institute for Human Development ( email )

Lentzeallee 94
D-14195 Berlin
Germany

Gerd Gigerenzer

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Human Development ( email )

Lentzeallee 94
D-14195 Berlin
Germany

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