99: Are retailers best responding to rational consumers? Experimental evidence

Bradley J. Ruffle, Ze'ev Shtudiner

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

There exist numerous theories that attempt to explain the ubiquitous 99-cent price ending. Most of these theories either do not hold up to inspection or posit irrational consumers who serve as a money pump for firms. We offer an experimental test of Basu's (Econ. Lett. 1997; 54:41-44) rational expectations equilibrium model in which consumers are fully rational. We find partial support for Basu's model. Convergence to the 99-cent equilibrium is faster and more widespread when firms are able to observe the previous pricing decisions of others. By imitating the optimal 99-cent price endings of rational firms, less rational firms display an 'as if' rationality.

Original languageEnglish
Pages (from-to)459-475
Number of pages17
JournalManagerial and Decision Economics
Volume27
Issue number6
DOIs
StatePublished - Sep 2006
Externally publishedYes

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