IDEAS home Printed from https://ideas.repec.org/p/edn/sirdps/269.html
   My bibliography  Save this paper

Reference distorted prices

Author

Listed:
  • Sákovics, József

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 evaluation, and for why trade might affect high quality local firms 'unfairly'.

Suggested Citation

  • Sákovics, József, 2011. "Reference distorted prices," SIRE Discussion Papers 2011-28, Scottish Institute for Research in Economics (SIRE).
    • Handle: RePEc:edn:sirdps:269
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10943/269
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Thaler, Richard H, 1990. "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 193-205, Winter.
    2. Soman, Dilip, 2001. "Effects of Payment Mechanism on Spending Behavior: The Role of Rehearsal and Immediacy of Payments," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 27(4), pages 460-474, March.
    3. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 73-92.
    4. Thaler, Richard H & Shefrin, H M, 1981. "An Economic Theory of Self-Control," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 392-406, April.
    5. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    6. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-1268, September.
    7. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(4), pages 1233-1260.
    8. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    9. Bolton, Gary E, 1991. "A Comparative Model of Bargaining: Theory and Evidence," American Economic Review, American Economic Association, vol. 81(5), pages 1096-1136, December.
    10. Briesch, Richard A, et al, 1997. "A Comparative Analysis of Reference Price Models," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 24(2), pages 202-214, September.
    11. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    12. Daniel S. Putler, 1992. "Incorporating Reference Price Effects into a Theory of Consumer Choice," Marketing Science, INFORMS, vol. 11(3), pages 287-309.
    13. Paul Heidhues & Botond Köszegi, 2004. "The Impact of Consumer Loss Aversion on Pricing," CIG Working Papers SP II 2004-17, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    14. Heath, Chip & Soll, Jack B, 1996. "Mental Budgeting and Consumer Decisions," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 23(1), pages 40-52, June.
    15. Narayan Janakiraman & Robert J. Meyer & Andrea C. Morales, 2006. "Spillover Effects: How Consumers Respond to Unexpected Changes in Price and Quality," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 33(3), pages 361-369, October.
    16. Gurumurthy Kalyanaram & Russell S. Winer, 1995. "Empirical Generalizations from Reference Price Research," Marketing Science, INFORMS, vol. 14(3_supplem), pages 161-169.
    17. Deaton, Angus S, 1977. "Involuntary Saving through Unanticipated Inflation," American Economic Review, American Economic Association, vol. 67(5), pages 899-910, December.
    18. Niedrich, Ronald W & Sharma, Subhash & Wedell, Douglas H, 2001. "Reference Price and Price Perceptions: A Comparison of Alternative Models," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 28(3), pages 339-354, December.
    19. Bruce G. S. Hardie & Eric J. Johnson & Peter S. Fader, 1993. "Modeling Loss Aversion and Reference Dependence Effects on Brand Choice," Marketing Science, INFORMS, vol. 12(4), pages 378-394.
    20. David R. Bell & James M. Lattin, 2000. "Looking for Loss Aversion in Scanner Panel Data: The Confounding Effect of Price Response Heterogeneity," Marketing Science, INFORMS, vol. 19(2), pages 185-200, May.
    21. Winer, Russell S, 1986. "A Reference Price Model of Brand Choice for Frequently Purchased Products," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 13(2), pages 250-256, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jozsef Sakovics, 2007. "Reference price distortion," Edinburgh School of Economics Discussion Paper Series 177, Edinburgh School of Economics, University of Edinburgh.
    2. Dmitri Kuksov & Kangkang Wang, 2014. "The Bright Side of Loss Aversion in Dynamic and Competitive Markets," Marketing Science, INFORMS, vol. 33(5), pages 693-711, September.
    3. Neumann, Nico & Böckenholt, Ulf, 2014. "A Meta-analysis of Loss Aversion in Product Choice," Journal of Retailing, Elsevier, vol. 90(2), pages 182-197.
    4. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2017. "A theory of price adjustment under loss aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 78-95.
    5. Teck H. Ho & Noah Lim & Colin Camerer, 2005. "Modeling the Psychology of Consumer and Firm Behavior with Behavioral Economics," Levine's Bibliography 784828000000000476, UCLA Department of Economics.
    6. repec:hum:wpaper:sfb649dp2014-065 is not listed on IDEAS
    7. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    8. Aurélien Baillon & Han Bleichrodt & Vitalie Spinu, 2020. "Searching for the Reference Point," Management Science, INFORMS, vol. 66(1), pages 93-112, January.
    9. Nicolau, Juan L., 2011. "Differentiated price loss aversion in destination choice: The effect of tourists’ cultural interest," Tourism Management, Elsevier, vol. 32(5), pages 1186-1195.
    10. Vincenzina Caputo & Jayson L Lusk & Rodolfo M Nayga, 2020. "Am I Getting a Good Deal? Reference‐DependentDecision Making When the Reference Price Is Uncertain," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(1), pages 132-153, January.
    11. van Oest, Rutger, 2013. "Why are Consumers Less Loss Averse in Internal than External Reference Prices?," Journal of Retailing, Elsevier, vol. 89(1), pages 62-71.
    12. Yuval Arbel & Danny Ben-Shahar & Stuart Gabriel, 2016. "Are The Disabled Less Loss Averse? Evidence From A Natural Policy Experiment," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 1291-1318, April.
    13. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    14. Biondi, Beatrice & Cornelsen, Laura & Mazzocchi, Mario & Smith, Richard, 2020. "Between preferences and references: Asymmetric price elasticities and the simulation of fiscal policies," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 108-128.
    15. Becker-Peth, Michael & Thonemann, Ulrich W., 2016. "Reference points in revenue sharing contracts—How to design optimal supply chain contracts," European Journal of Operational Research, Elsevier, vol. 249(3), pages 1033-1049.
    16. Moon, Sangkil & Voss, Glenn, 2009. "How do price range shoppers differ from reference price point shoppers?," Journal of Business Research, Elsevier, vol. 62(1), pages 31-38, January.
    17. Necati Tereyağoğlu & Peter S. Fader & Senthil Veeraraghavan, 2018. "Multiattribute Loss Aversion and Reference Dependence: Evidence from the Performing Arts Industry," Management Science, INFORMS, vol. 64(1), pages 421-436, January.
    18. Santana, Shelle & Thomas, Manoj & Morwitz, Vicki G., 2020. "The Role of Numbers in the Customer Journey," Journal of Retailing, Elsevier, vol. 96(1), pages 138-154.
    19. Simon Gächter & Eric J. Johnson & Andreas Herrmann, 2022. "Individual-level loss aversion in riskless and risky choices," Theory and Decision, Springer, vol. 92(3), pages 599-624, April.
    20. Ioana Popescu & Yaozhong Wu, 2007. "Dynamic Pricing Strategies with Reference Effects," Operations Research, INFORMS, vol. 55(3), pages 413-429, June.
    21. Sojin Jung & Hyeon Jeong Cho & Byoungho Ellie Jin, 2020. "Does effective cost transparency increase price fairness? An analysis of apparel brand strategies," Journal of Brand Management, Palgrave Macmillan, vol. 27(5), pages 495-507, September.

    More about this item

    JEL classification:

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:edn:sirdps:269. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Research Office (email available below). General contact details of provider: https://edirc.repec.org/data/sireeuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.