Consumer Cognition and Pricing in the 9's in Oligopolistic Markets

30 Pages Posted: 14 Dec 2004  

Kaushik Basu

Cornell University - Department of Economics; Harvard University - Harvard Institute of Economic Research; IZA Institute of Labor Economics; World Bank

Date Written: December 2004

Abstract

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.

JEL Classification: D43, L13

Suggested Citation

Basu, Kaushik, Consumer Cognition and Pricing in the 9's in Oligopolistic Markets (December 2004). Harvard Institute of Economic Research Discussion Paper No. 2053. Available at SSRN: https://ssrn.com/abstract=634722 or http://dx.doi.org/10.2139/ssrn.634722

Kaushik Basu (Contact Author)

Cornell University - Department of Economics ( email )

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Harvard University - Harvard Institute of Economic Research ( email )

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IZA Institute of Labor Economics

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World Bank

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