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Hysteresis, Price Acceptance, and Reference Prices
Author(s) -
Richards Timothy J.,
Gómez Miguel I.,
Printezis Iryna
Publication year - 2016
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1093/ajae/aav059
Subject(s) - economics , econometrics , aggregate (composite) , contrast (vision) , hysteresis , prospect theory , microeconomics , adaptation (eye) , psychology , computer science , materials science , physics , quantum mechanics , artificial intelligence , composite material , neuroscience
The existence of price thresholds in grocery retailing is well‐documented. Most authors explain the existence of price thresholds using Assimilation‐Contrast Theory, Adaptation Level Theory, or Prospect Theory. However, each of these theories is untenable if consumers are believed to behave rationally. We offer a theoretical explanation grounded in Real Options Theory (ROT) and economic hysteresis. We test the ROT hypothesis against three plausible alternatives using a maximum likelihood friction model that we augment for unobserved heterogeneity. Our findings support the ROT hypothesis, and suggest that the existence of price thresholds in aggregate data are driven by a common recognition of real option values, which do not disappear with the inclusion of consumer heterogeneity.