99: Are Retailers Best Responding to Rational Consumers? Experimental Evidence
34 Pages Posted: 9 Dec 2002
Date Written: July 2003
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 (1997) rational expectations equilibrium model, an economic model of the phenomenon in which consumers are fully rational. We find ample 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.
Note: Previously titled "A Rational Explanation for Price Endings in 99: Experimental Evidence"
Keywords: 99 cents, experimental economics, rational expectations, public goods, imitation
JEL Classification: C90, D42, M31
Suggested Citation: Suggested Citation
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