Consumer Cognition and Pricing in the 9's in Oligopolistic Markets
Cornell University - Department of Economics; Harvard University - Harvard Institute of Economic Research; IZA Institute of Labor Economics; World Bank
Harvard Institute of Economic Research Discussion Paper No. 2053
The paper fully characterizes the Bertrand equilibria of oligopolistic markets where consumers may ignore the last (i.e. the right-most) digits of prices. Consumers, in this model, do not do this reflexively or out of irrationality, but only when they expect the time cost of acquiring full cognizance of the exact price to exceed the expected loss caused by the slightly erroneous amounts that is likely to be purchased or the slightly higher price that may be paid by virtue of ignoring the information concerning the last digits of prices.
It is shown that in this setting there will always exist firms that set prices that end in nine though there may also be some (non-strict) equilibria where a non-nine price ending occurs. It is shown that all firms earn positive profits even in Bertrand equilibria. The model helps us understand in what kinds of markets we are most likely to encounter pricing in the 9's.
Number of Pages in PDF File: 30
JEL Classification: D43, L13
Date posted: December 14, 2004