Hysteresis, Price Acceptance, and Reference Prices. (23rd November 2015)

• Record Type: Journal Article
• Authors: Richards, Timothy J.; Gómez, Miguel I.; Printezis, Iryna
• Is Part Of: American journal of agricultural economics. Volume 98:Number 3(2016)
• Page Start: 679
• Page End: 706
• Publication Date: 2015-11-23
• Subjects: Consumer search -- hysteresis -- reference prices -- real options -- retail prices -- thresholds; Agriculture -- Economic aspects -- Periodicals; Agriculture -- Periodicals; 338.105
• DOI: 10.1093/ajae/aav059
• Languages: English
• ISSNs: 0002-9092

Abstract

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.