Altruistic Dynamic Pricing with Customer Regret

• Published in: The Scandinavian journal of economics Vol. 112; no. 4; pp. 646 - 672
• Main Author: Rotemberg, Julio J.
• Format: Journal Article
• Language: English
• Published: Oxford, UK Blackwell Publishing Ltd 01.12.2010; Blackwell Publishing; Wiley Blackwell
• Series: Scandinavian Journal of Economics
• Subjects: Analysis; Business studies; Consumer prices; Consumer psychology; Customers; D 11; E 31; Economic costs; Economic models; Fixed costs; Industrial prices; Industrial pricing; Inflation; Inflation rates; L 11; New products; Price changes; Price formation; Price increases; Price level changes; Price policy; price pre-announcements; Prices; Product management; Regret; Rigid prices; Sticky prices; Studies
• ISSN: 0347-0520; 1467-9442; 1467-9442
• DOI: 10.1111/j.1467-9442.2010.01620.x

A model is considered in which firms internalize the costly regret that consumers experience when prices change unexpectedly. This regret is greater when prices change by more, and this can explain why the actual size of price increases for firms with rigid prices is less sensitive to inflation than in models with fixed costs of changing prices. Regret costs of this form also lead to more variable price changes than fixed costs do. Last, the practice of announcing price increases in advance is easier to rationalize with regret concerns by consumers than with more standard approaches to price rigidity.