Abstract
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.
Original language | English (US) |
---|---|
Pages (from-to) | 679-706 |
Number of pages | 28 |
Journal | American Journal of Agricultural Economics |
Volume | 98 |
Issue number | 3 |
DOIs | |
State | Published - Apr 1 2016 |
Keywords
- Consumer search
- hysteresis
- real options
- reference prices
- retail prices
- thresholds
ASJC Scopus subject areas
- Agricultural and Biological Sciences (miscellaneous)
- Economics and Econometrics