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Reference price distortion

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Abstract

I show that when consumers (mis)perceive prices relative to reference prices, budgets turn out to be soft, prices tend to be lower and the average quality of goods sold decreases. These observations provide explanations for decentralized purchase decisions, for people being happy with a purchase even when they have paid their "valuation", and for why trade might be detrimental to welfare.

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  • Jozsef Sakovics, 2007. "Reference price distortion," Edinburgh School of Economics Discussion Paper Series 177, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:177
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