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| Author: | Rotemberg, J.J. |
| Title: | Altruistic dynamic pricing with customer regret |
| Journal: | Scandinavian Journal of Economics
2010 : VOL. 112:4 p. 646-672 |
| Index terms: | prices models companies fixed costs consumers |
| Language: | eng |
| Abstract: | This paper proposes a model where companies internalize the regret costs that consumers experience when they see an unexpected price change. Regret costs are assumed to be rising in the size of price changes and this can explain why the size of price rises is less sensitive to inflation than in models with fixed costs of changing prices. The latter predict unrealistically large responses of price changes to inflation for firms that do not frequently reduce their prices. Adjustment costs which depend on the size of price changes also raise the variability on the size of price increases. Finally, it is argued that the common practice of announcing price increases in advance is much easier to rationalize with regret concerns by consumers than with more standard approaches to price rigidity. |
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