Consumer Cognition and Pricing in the Nines in Oligopolistic Markets

17 Pages Posted: 13 Apr 2006

See all articles by Kaushik Basu

Kaushik Basu

Cornell University - Department of Economics; IZA Institute of Labor Economics; Brookings Institution

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 are 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 (nonstrict) 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 nines.

Suggested Citation

Basu, Kaushik, Consumer Cognition and Pricing in the Nines in Oligopolistic Markets. Journal of Economics & Management Strategy, Vol. 15, No. 1, pp. 125-141, March 2006. Available at SSRN: https://ssrn.com/abstract=874122 or http://dx.doi.org/10.1111/j.1530-9134.2006.00094.x

Kaushik Basu (Contact Author)

Cornell University - Department of Economics ( email )

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IZA Institute of Labor Economics

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Brookings Institution ( email )

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