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Consumer Cognition and Pricing in the Nines of Oligopolistic Markets

Author
Basu, Kaushik
Abstract
The paper fully characterizes the Bertrand equilibria of oligopolistic markets
where consumers may ignore the last (i.e., the right-most) digits of prices.
Consumers, in this model, do not do this reflexively or out of irrationality, but
only when they expect the time cost of acquiring full cognizance of the exact
price to exceed the expected loss caused by the slightly erroneous amounts that
are likely to be purchased or the slightly higher price that may be paid by virtue
of ignoring the information concerning the last digits of prices. It is shown
that in this setting there will always exist firms that set prices that end in nine
though there may also be some (nonstrict) equilibria where a non-nine price
ending occurs. It is shown that all firms earn positive profits even in Bertrand
equilibria. The model helps us understand in what kinds of markets we are most
likely to encounter pricing in the nines.