99: Are Retailers Best Responding to Rational Consumers? Experimental Evidence

34 Pages Posted: 9 Dec 2002

See all articles by Bradley J. Ruffle

Bradley J. Ruffle

McMaster University

Ze'ev Shtudiner

Ariel University - Department of Economics

Date Written: July 2003

Abstract

There exist numerous theories that attempt to explain the ubiquitous 99-cent price ending. Most of these theories either do not hold up to inspection or posit irrational consumers who serve as a money pump for firms. We offer an experimental test of Basu's (1997) rational expectations equilibrium model, an economic model of the phenomenon in which consumers are fully rational. We find ample support for Basu's model. Convergence to the 99-cent equilibrium is faster and more widespread when firms are able to observe the previous pricing decisions of others. By imitating the optimal 99-cent price endings of rational firms, less rational firms display an "as if" rationality.

Note: Previously titled "A Rational Explanation for Price Endings in 99: Experimental Evidence"

Keywords: 99 cents, experimental economics, rational expectations, public goods, imitation

JEL Classification: C90, D42, M31

Suggested Citation

Ruffle, Bradley J. and Shtudiner, Ze'ev, 99: Are Retailers Best Responding to Rational Consumers? Experimental Evidence (July 2003). Available at SSRN: https://ssrn.com/abstract=331466 or http://dx.doi.org/10.2139/ssrn.331466

Bradley J. Ruffle (Contact Author)

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

HOME PAGE: http://https://socialsciences.mcmaster.ca/people/ruffle-bradley

Ze'ev Shtudiner

Ariel University - Department of Economics ( email )

Ariel, 40300
Israel

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