Psychological Thresholds, Demand and Price Rigidity (original) (raw)

REVISITING HUMAN BEHAVIOUR THROUGH DEMAND ANALYSIS: WHY A DEMAND CURVE MAY NOT BE DOWNWARD SLOPING?

Assumption of a downward sloping demand curve establishes a negative relationship between price and quantity demanded. Unfortunately, in real life, we do not come across such downward sloping demand curves. On the other hand, what we observe in real life is, within a specific price range, a consumer consumes fixed amount of a commodity irrespective of the price and abandons the commodity beyond the price range. The paper argues that a consumer classifies different commodities as necessary and unnecessary and develops a sort of inertia of demand loyalty for the specific commodities she consumes. During price fluctuations, she may have to spend more or less of money on the commodity, but her consumption remains the same. Therefore, the demand curve should be a vertical straight line irrespective of the levels of prices. A typical consumer would switch over to another new commodity and will not reduce the quantity consumed of the existing commodity if she finds the present commodity more pricey or the other more affordable. The paper draws on some of the available literature on the critical analysis of demand as a concept and makes an effort to present the understanding through arguments and some real life examples.

The Threshold-Crossing Effect: Just-Below Pricing Discourages Consumers to Upgrade

Journal of Consumer Research, 2021

Managers often set prices just-below a round number (e.g., $39)—a strategy that lowers price perceptions and increases sales. The authors question this conventional wisdom in a common consumer context: upgrade decisions (e.g., whether to upgrade a rental car or hotel room). Seven studies—including one field study—provide empirical evidence for a threshold-crossing effect. When a base product is priced at or just-above a threshold, consumers are more likely to upgrade and spend more money (studies 1–3) because they perceive the upgrade option as less expensive (study 4), and they place less weight on price (study 5). Testing theoretically motivated and managerially relevant boundary conditions, studies find that the threshold-crossing effect is mitigated under sequential choice (study 6) and when an upgrade price crosses an upper threshold (study 7). These studies demonstrate that a small increase in price on a base product can decrease price perceptions of an upgrade option and, thu...

Zero-Ending Prices, Cognitive Convenience, and Price Rigidity

Journal of Economic Behavior and Organization (Forthcoming), 2022

We assess the role of cognitive convenience in the popularity and rigidity of 0ending prices in convenience settings. Studies show that 0-ending prices are common at convenience stores because of the transaction convenience that 0-ending prices offer. Using large store-level retail CPI data, we find that 0-ending prices are popular and rigid at convenience stores even when they offer little transaction convenience. We corroborate these findings with two large retail scanner price datasets from Dominick's and Nielsen. In Dominick's data, we find that there are more 0-endings in the prices of the items in the front-end candies category than in any other category, even though these prices do not affect the convenience of the consumer's check-out transaction. In addition, in both Dominick's and Nielsen datasets, we find that 0-ending prices have a positive effect on demand. Ruling out consumer antagonism and retailers' use of heuristics in pricing, we conclude that 0-ending prices are popular and rigid, and that they increase demand in convenience settings, not only for their transaction convenience but also for the cognitive convenience they offer.