Wednesday, December 5, 2012
Posted by D. Daniel Sokol
Avichai Snir, Bar Ilan University - Department of Economics, Daniel Levy, Bar-Ilan University - Department of Economics, Emory University - Department of Economics, Rimini Center for Economic Analysis, Alex Gotler, Open University of Israel and Haipeng (Allan) Chen, Texas A&M University discuss how Not All Price Endings Are Created Equal: Price Points and Asymmetric Price Rigidity.
ABSTRACT: 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.