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Price Reference Effects in Consumer Demand

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  • Pesendorfer, Martin
  • Gentry, Matthew

Abstract

We develop a structural model of demand with expectations-based reference effects following Koszegi and Rabin (2006). We apply this model to panel data on ketchup purchases and a repeated cross section on automobile purchases, finding significant reference effects in both cases. Estimated reference effects imply substantial differences between short- and long-run demand responses, with magnitudes comparable to a dynamic stockpiling model. This attractive model feature allows us to explore price policy alternatives such as high-low versus every-day-low-pricing at low computational cost. Finally, we embed the model within a fully dynamic framework additionally accommodating limited attention and forward-looking search.

Suggested Citation

  • Pesendorfer, Martin & Gentry, Matthew, 2018. "Price Reference Effects in Consumer Demand," CEPR Discussion Papers 13382, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13382
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    Cited by:

    1. Gentry, Matthew & Pesendorfer, Martin, 2021. "Pricing with bargain hunting consumers," Games and Economic Behavior, Elsevier, vol. 129(C), pages 549-569.
    2. Schiraldi, Pasquale & Levy, Matthew R., 2020. "Identification of intertemporal preferences in history-dependent dynamic discrete choice models," CEPR Discussion Papers 14447, C.E.P.R. Discussion Papers.

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