Snir, Avichai and Levy, Daniel and Gotler, Alex and Chen, Haipeng (Allan) (2012): Not All Price Endings Are Created Equal: Price Points and Asymmetric Price Rigidity.
Download (256kB) | Preview
There is evidence that 9-ending prices are more common and more rigid than other prices. We use data from three sources: a laboratory experiment, a field study, and a large US supermarket chain, to study the cognitive underpinning and the ensuing asymmetry in rigidity associated with 9-ending prices. We find that consumers use 9-endings as a signal for low prices, and that this signal interferes with price information processing. Consequently, consumers are less likely to notice a bigger price when it ends with 9, or a price increase when the new price ends with 9, in comparison to a situation where the prices end with some other digit. We also find that retailers respond strategically to this consumer bias by setting 9-ending prices more often after price increases than after price decreases. 9-ending prices, therefore, usually increase only if the new prices are also 9-ending. Consequently, there is an asymmetry in the rigidity of 9-ending prices: they are more rigid than non 9-ending prices upward but not downward.
|Item Type:||MPRA Paper|
|Original Title:||Not All Price Endings Are Created Equal: Price Points and Asymmetric Price Rigidity|
|Keywords:||Price Points; Price Recall; Sticky Prices; Rigid Prices; Price Adjustment; 9-Ending Prices; Psychological Prices|
|Subjects:||L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change ; Industrial Price Indices
D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles
M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M31 - Marketing
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C93 - Field Experiments
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
|Depositing User:||Daniel Levy|
|Date Deposited:||28 Oct 2012 03:51|
|Last Modified:||24 Mar 2017 06:33|
Anderson, E and D Semester (2003), "Effects of $9 Price-Endings on Sales: Evidence from Field Experiments," Quantitative Marketing and Economics 1(1), 93–110. Ball, L. and D. Romer (2003), “Inflation and the Informativeness of Prices,” Journal of Money, Credit and Banking 35(2), 177–196. Barsky, R., et al. (2003), "What Can the Price Gap between Branded and Private Label Products Tell Us about Markups?" In R. Feenstra and M. Shapiro, Eds., Scanner Data and Price Indexes (Chicago, IL: University of Chicago Press), pp. 165–225. Basu, K. (1997), "Why Are So Many Goods Priced to End Nine? And Why This Practice Hurts Producers," Economics Letters 54(1), 41–44. Basu, K. (2006), "Consumer Cognition and Pricing in the Nines in Oligopolistic Markets," Journal of Economics and Management Strategy 15(1), 125–141. Benford, F. (1938), "The Law of Anomalous Numbers," Proceedings of the American Philosophy Society 78, 551–572. Bergen, M., et al. (2008), “On the Inefficiency of Item Pricing Laws: Theory and Evidence,” Journal of Law and Economics 51(2), 209–250. Bergen, M., R. Kauffman and D. Lee (2005), "Price Points and Price Rigidity on the Internet: A Massive Quasi-Experimental Data Mining Approach," manuscript. Bils, M. and P. Klenow (2004), "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy 112(5), 947–985. Blinder, A., et al. (1998), Asking about Prices (NY, NY: Russell Sage Foundation). Carlton, D. (1986), “The Rigidity of Prices,” American Economic Review 76, 637–658. Chen, H., et al. (2008), “Asymmetric Price Adjustment in the Small,” Journal of Monetary Economics 55(4), 728–737. Cecchetti, S. (1986), "The Frequency of Price Adjustment: A Study of the Newsstand Prices of Magazines," Journal of Econometrics 31(3), 255–274. Chevalier, J., et al. (2003), "Why Don’t Prices Rise during Peak Demand Periods? Evidence from Scanner Data," American Economic Review 93, 15–37. Danziger, L. (1999), "A Dynamic Economy with Costly Price Adjustments," American Economic Review 89(4), 878–901. Dehaene, S. and Mehler, J. (1992), “Cross-Linguistic Regularities in the Frequency of Number Words,” Cognition 43, 1–29. Dutta, S., et al. (1999), "Menu Costs, Posted Prices, and Multiproduct Retailers," Journal of Money, Credit and Banking 31(4), 683–703. Dutta, S., et al. (2002), “Price Flexibility in Channels of Distribution: Evidence from Scanner Data,” Journal of Economic Dynamics and Control 26(11), 1845–1900. Eichenbaum, M., N. Jaimovich, and S. Rebelo (2011), “Reference Prices, Costs and Nominal Rigidities,” American Economic Review 101, 234–262. Hill, T. P. (1995), "A Statistical Derivation of the Significant-Digit Law," Statistical Science 10(4), 354–363. Kahneman, D. and S. Frederick (2002), "Representativeness Revisited: Attribute Substitution in Intuitive Judgment," in Gilovich, T. et al. (Eds.), Heuristics and Biases (UK: Cambridge University Press), pp. 49–81. Kashyap, A. (1995), "Sticky Prices: New Evidence from Retail Catalogs," Quarterly Journal of Economics 110(1), 245–274. Kalayanaram, G. and R. Winer (1995), “Empirical Generalization from Reference Price Research,” Marketing Science 14(3), G161–G169. Kehoe, P. and V. Midrigan (2008), “Temporary Price Changes and the Real Effects of Monetary Policy,” NBER WP No. 14392. Kehoe, P. and V. Midrigan (2010), “Prices Are Sticky After All,” RSR 413, Fed of Mpls. Klenow, P. and O. Kryvtsov (2008), “State-Dependent vs. Time-Dependent Pricing: Does it Matter for Recent US Inflation?” Quarterly Journal of Economics 123, 863–904. Klenow, P. and B. Malin (2011), “Microeconomic Evidence on Price-Setting,” in B. Friedman and M. Woodford (Eds.), Handbook of Monetary Economics, 3A-B (NY, NY: North Holland), pp. 231–284. Knotek, E. (2010), "The Roles of Menu Costs and Nine Endings in Price Rigidity," Research Working Paper No. 10-18, Federal Reserve Bank of Kansas City. Knotek, E. (2011), “Convenient Prices and Price Rigidity: Cross-Section Evidence,” Review of Economics and Statistics 93(3), 1076–1086. Konieczny, J. (1993), "Variable Price Adjustment Costs," Economic Inquiry 31, 488–98. Lach, S. and D. Tsiddon (1992), "The Behavior of Prices and Inflation: An Empirical Evidence of Disaggregate Price Data," Journal of Political Economy 100, 349–89. Lach, S. and D. Tsiddon (1996), "Staggering and Synchronization in Price Setting: Evidence from Multiproduct Firms," American Economic Review 86, 1175–1196. Lachman, R., et al. (1979), Cognitive Psychology and Information Processing: An Introduction (Hillsdale, NJ: Lawrence Erblaum Associates). Levy, D., et al. (1997), "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," Quarterly Journal of Economics 112, 791–825. Levy, D., et al. (2002), “Heterogeneity in Price Rigidity: Evidence from Primary Micro Level Data,” Journal of Money, Credit, and Banking 34, 197–220. Levy, D., et al. (2010), “Holiday Price Rigidity and Cost of Price Adjustment,” Economica 77, 172–198. Levy, D., et al. (2011), "Price Points and Price Rigidity," Review of Economics and Statistics 93(4), 1417–1431. Levy, D. and A. Young (2004), “The Real Thing: Nominal Price Rigidity of the Nickel Coke, 1886–1959,” Journal of Money, Credit and Banking 36, 765–799. Macé, S. (2012), "The Impact and Determinants of Nine-Ending Pricing in Grocery Retailing," Journal of Retailing 88(1), 115–130. Mankiw, N.G. (1985), “Small Menu Costs and Large Business Cycles: a Macroeconomic Model of Monopoly,” Quarterly Journal of Economics 100, 529–539. Mazumdar, T. and P. Papatla (2000), “An Investigation of Reference Price Segments,” Journal of Marketing Research 38, 246–258. Midrigan, V. (2011), “Menu Costs, Multi-Product Firms, and Aggregate Fluctuations,” Econometrica 79, 1139–1180. Monroe, K. and A. Lee (1999), "Remembering vs. Knowing: Issues in Buyers' Processing of Price Info," Journal of Academy of Marketing Science 27(2), 207–225. Nakamura, E. and J. Steinsson (2008), “Five Facts about Prices: A Reevaluation of Menu Cost Models,” Quarterly Journal of Economics 123(4), 1415–1464. Nakamura, E. and J. Steinsson (2011), “Price Setting in Forward-Looking Customer Markets,” Journal of Monetary Economics 58(3), 220–233. Nevo, A. (2002), "Measuring Market Power in the Ready to Eat Cereal Industry," Econometrica 69, 307–342. Newcomb, S. (1881), "Note on the Frequency of the Use of Digits in Natural Numbers," American Journal of Mathematics 4, 39–40. Nigrini, M. (2002), Using Microsoft Access for Data Analysis and Interrogation. Peltzman, S. (2000), “Prices Rise Faster than They Fall,” Journal of Political Economy 108, 466–502. Poltrock, S. and D. Schwartz (1984), "Comparative Judgments of Multidigit Numbers," Journal of Experimental Psychology 10, 32–45. Ray, S., et al. (2006), "Asymmetric Wholesale Pricing: Theory and Evidence," Marketing Science 25, 131–54. Rotemberg J (1982) "Sticky Prices in the US" Journal of Political Econ 90 1187–1211. Rotemberg, J. (1987), “The New Keynesian Microfoundations,” NBER Annual, 69–104. Rotemberg, J. (2005), “Customer Anger at Price Increases, Changes in the Frequency of Price Adjustment, and Monetary Policy” Journal of Monetary Economics, 82952. Rotemberg, J. (2010), “Altruistic Dynamic Pricing with Customer Regret,” Scandinavian Journal of Economics 112(4), 646672. Ruffle, B. and Z. Shtudiner (2006), “99: Are Retailers Best Responding to Rational Consumers?” Managerial and Decision Economics 27, 459–75. Schindler, R. (1984), "Consumers Recognition of Increases in Odd and Even Prices," Advances in Consumer Research 11, 459–462. Schindler, R. (2001), "Relative Price Level of 99-Ending Prices: Image vs. Reality," Marketing Letters 12(3), 239–247. Schindler, R. (2006), "The 99 Price-Ending as a Signal of a Low-Price Appeal," Journal of Retailing 82(1), 71–77. Schindler, R. and R. Chandrashekaran (2004), "Influence of Price-Endings on Price Recall: a by-Digit Analysis," Journal of Product and Brand Management 13, 514–524. Schindler, R. and P. Kirby (1997), "Patterns of Right Most Digits Used in Advertised Prices," Journal of Consumer Research 24, 192–200. Snir, A. and D. Levy (2011), "Shrinking Goods and Sticky Prices," Working Paper. Stiving, M. (2000), "Price-Endings When Prices Signal Quality," Management Science 46(12), 1617–1629. Stiving, M. and R. Winer (1997), "An Empirical Analysis of Price-Endings with Scanner Data," Journal of Consumer Research 24(1), 57–67. Thomas, M. and V. Morwitz (2005), "Penny Wise and Pound Foolish: The Left-Digit Effect in Price Cognition," Journal of Consumer Research 32, 54–64. Varian, H. (1972), "Benford's Law," American Statistician 26(3), 65–66. Warner, E. and R. Barsky (1995), “The Timing and Magnitude of Retail Store Markdowns,” Quarterly Journal of Economics 110(2), 321–352. Willis, J. (2003), “Implications of Structural Changes in the US Economy for Pricing Behavior and Inflation Dynamics,” Fed of KC Economic Review (1st Q.), 5–26. Wolman, A (2007), “The Frequency and Costs of Individual Price Adjustment: A Survey,” Managerial and Decision Economics 28(6), 531–552. Zbaracki, M., et al. (2004), "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Review of Economics and Statistics 86, 514–33.