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More Than a Penny’s Worth: Left-Digit Bias and Firm Pricing

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  • Avner Strulov-Shlain

Abstract

Firms arguably price at ninety-nine-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 twenty-five U.S. chains provides robust support for this explanation. I structurally estimate the magnitude of left-digit bias and find that consumers respond to a one-cent increase from a ninety-nine-ending price as if it were more than a twenty-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 ninety-nine-ending prices, their behaviour 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 1–4% of potential gross profits due to this coarse response to left-digit bias.

Suggested Citation

  • Avner Strulov-Shlain, 2023. "More Than a Penny’s Worth: Left-Digit Bias and Firm Pricing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(5), pages 2612-2645.
    • Handle: RePEc:oup:restud:v:90:y:2023:i:5:p:2612-2645.
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    File URL: http://hdl.handle.net/10.1093/restud/rdac082
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    Citations

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    Cited by:

    1. Doron Sayag & Avichai Snir & Daniel Levy, 2024. "Small Price Changes, Sales Volume, and Menu Cost," Papers 2403.07166, arXiv.org.
    2. Avi Goldfarb & Mo Xiao, 2024. "Transitory shocks, limited attention, and a firm’s decision to exit," Quantitative Marketing and Economics (QME), Springer, vol. 22(3), pages 223-255, September.
    3. Reyes, Germán, 2024. "Coarse Wage-Setting and Behavioral Firms," IZA Discussion Papers 17039, Institute of Labor Economics (IZA).

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