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- Title
HYSTERESIS, PRICE ACCEPTANCE, AND REFERENCE PRICES.
- Authors
RICHARDS, TIMOTHY J.; GÓMEZ, MIGUEL I.; PRINTEZIS, IRYNA
- Abstract
The existence of price thresholds in grocery retailing is well-documented. Most authors explain the existence of price thresholds using Assimilation-Contrast Theory, Adaptation Level Theory, or Prospect Theory. However, each of these theories is untenable if consumers are believed to behave rationally. We offer a theoretical explanation grounded in Real Options Theory (ROT) and economic hysteresis. We test the ROT hypothesis against three plausible alternatives using a maximum likelihood friction model that we augment for unobserved heterogeneity. Our findings support the ROT hypothesis, and suggest that the existence of price thresholds in aggregate data are driven by a common recognition of real option values, which do not disappear with the inclusion of consumer heterogeneity.
- Subjects
HYSTERESIS (Economics); REFERENCE pricing; REAL options (Finance); CONSUMER behavior; MAXIMUM likelihood statistics
- Publication
American Journal of Agricultural Economics, 2016, Vol 98, Issue 3, p679
- ISSN
0002-9092
- Publication type
Article
- DOI
10.1093/ajae/aav059