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Optimal Strategy Of Multi-Product Retailers With Relative Thinking And Reference Prices

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  • Ofer H. Azar

    (BGU)

Abstract

Experimental evidence suggests that consumers are affected by reference prices and by relative price differences ("relative thinking"). A linear-city model of two retailers that sell two goods suggests how this consumer behavior affects firm strategy and market outcomes. A simple model analyzes the case in which all consumers want to buy both goods. An extended version adds consumers who want only one good. Relative thinking leads firms to increase the markup on the good with the higher reference price and decrease the markup on the other good, possibly to a negative markup. Stronger relative thinking increases the firms' profits.

Suggested Citation

  • Ofer H. Azar, 2013. "Optimal Strategy Of Multi-Product Retailers With Relative Thinking And Reference Prices," Working Papers 1313, Ben-Gurion University of the Negev, Department of Economics.
    • Handle: RePEc:bgu:wpaper:1313
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    Cited by:

    1. Rudy Douven & Ron van der Heijden & Thomas McGuire & Frederik T. Schut, 2017. "Premium Levels and Demand Response in Health Insurance: Relative Thinking and Zero-Price Effects," NBER Working Papers 23846, National Bureau of Economic Research, Inc.
    2. Inderst, Roman & Obradovits, Martin, 2021. "Loss Leading as a Threat to Brands," EconStor Preprints 253667, ZBW - Leibniz Information Centre for Economics.
    3. Roman Inderst & Martin Obradovits, 2023. "Excessive Competition On Headline Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 783-808, May.
    4. Rudy Douven & Ron van der Heijden & Thomas McGuire & Erik Schut, 2017. "Premium levels and demand response in health insurance: relative thinking and zero-price effects," CPB Discussion Paper 366, CPB Netherlands Bureau for Economic Policy Analysis.
    5. Ofer H Azar, 2015. "A Linear City Model with Asymmetric Consumer Distribution," PLOS ONE, Public Library of Science, vol. 10(6), pages 1-13, June.
    6. Douven, Rudy & van der Heijden, Ron & McGuire, Thomas & Schut, Frederik, 2020. "Premium levels and demand response in health insurance: relative thinking and zero-price effects," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 903-923.
    7. Helfrich, Magdalena & Herweg, Fabian, 2020. "Context-dependent preferences and retailing: Vertical restraints on internet sales," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 87(C).
    8. Quan Zheng & Xiajun Amy Pan & Janice E. Carrillo, 2019. "Probabilistic Selling for Vertically Differentiated Products with Salient Thinkers," Marketing Science, INFORMS, vol. 38(3), pages 442-460, May.
    9. Rudy Douven & Ron van der Heijden & Thomas McGuire & Erik Schut, 2017. "Premium levels and demand response in health insurance: relative thinking and zero-price effects," CPB Discussion Paper 366.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    10. Fabrizi, Simona & Lippert, Steffen & Puppe, Clemens & Rosenkranz, Stephanie, 2016. "Manufacturer suggested retail prices, loss aversion and competition," Journal of Economic Psychology, Elsevier, vol. 53(C), pages 141-153.

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    More about this item

    Keywords

    Behavioral economics; Relative thinking; Heuristics and biases; Competitive strategy; Spatial differentiation; Loss leaders; Retailing.;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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