More than a Penny's Worth: Left-Digit Bias and Firm Pricing

77 Pages Posted: 2 Jul 2019 Last revised: 30 Aug 2021

See all articles by Avner Strulov-Shlain

Avner Strulov-Shlain

University of Chicago - Booth School of Business

Date Written: July 23, 2021

Abstract

Firms arguably price at 99-ending prices because of left-digit bias—the tendency of consumers to perceive a $4.99 as much lower than a $5.00. Analysis of retail scanner data on 3500 products sold by 25 US chains provides robust support for this explanation. I structurally estimate the magnitude of left-digit bias and find that consumers respond to a 1-cent increase from a 99-ending price as if it were more than a 20-cent increase. Next, I solve a portable model of optimal pricing given left-digit biased demand. I use this model and other pricing procedures to estimate the level of left-digit bias retailers perceive when making their pricing decisions. While all retailers respond to left-digit bias by using 99-ending prices, their behavior is consistently at odds with the demand they face. Firms price as if the bias were much smaller than it is, and their pricing is more consistent with heuristics and rule-of-thumb than with optimization given the structure of demand. I calculate that retailers forgo 1 to 4 percent of potential gross profits due to this coarse response to left-digit bias.

JEL Classification: D90, D12, D22, L11, L20, L81

Suggested Citation

Strulov-Shlain, Avner, More than a Penny's Worth: Left-Digit Bias and Firm Pricing (July 23, 2021). Chicago Booth Research Paper No. 19-22, Available at SSRN: https://ssrn.com/abstract=3413019 or http://dx.doi.org/10.2139/ssrn.3413019

Avner Strulov-Shlain (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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