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Reference distorted prices

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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 affect high quality local firms "unfairly".

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  • Jozsef Sakovics, 2011. "Reference distorted prices," Edinburgh School of Economics Discussion Paper Series 203, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:203
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    Cited by:

    1. Jim Engle-Warnick & Natalia Mishagina, 2014. "Insensitivity to Prices in a Dictator Game," CIRANO Working Papers 2014s-19, CIRANO.
    2. Jozsef Sakovics & Daniel Friedman, 2011. "The marginal utility of money: A modern Marshallian approach to consumer choice," Edinburgh School of Economics Discussion Paper Series 209, Edinburgh School of Economics, University of Edinburgh.
    3. Sákovics, József, 2015. "Tractable valuations under uncertainty," Economics Letters, Elsevier, vol. 126(C), pages 68-70.
    4. Gentry, Matthew & Pesendorfer, Martin, 2021. "Pricing with bargain hunting consumers," Games and Economic Behavior, Elsevier, vol. 129(C), pages 549-569.
    5. Gentry, Matthew & Pesendorfer, Martin, 2021. "Pricing with bargain hunting consumers," LSE Research Online Documents on Economics 111591, London School of Economics and Political Science, LSE Library.
    6. Sákovics, József, 2014. "Tractable valuations under uncertainty," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-41, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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