Hysteresis, Price Acceptance, and Reference Prices

The existence of price thresholds in grocery retailing is well-documented. Most authors explain the existence of price thresholds using Assimilation-Contrast Theory (ACT), Adaptation Level Theory (ALT) or Prospect Theory (PT). However, each of these theories is untenable if consumers are believed to behave rationally. We offer a theoretical explanation grounded in Real Options Theory (ROT) and economic hysteresis. We test the ROT hypothesis against three plausible alternatives using a maximum likelihood friction model that we augment for unobserved heterogeneity. Our findings support the ROT hypothesis, and suggests that the existence of price thresholds in aggregate data are driven by a common recognition of real option values, which do not disappear with the inclusion of consumer heterogeneity.


Issue Date:
2014
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/164872
Total Pages:
48
JEL Codes:
D12; D83; L13; L81.




 Record created 2017-04-01, last modified 2017-08-27

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