The 99¢ Dissertation: Essays on Psychological Pricing and Search

Abstract

Prices play a critical role in economics by guiding the efficient allocation of resources in market-based economies. In this dissertation I address two puzzles regarding prices: why so many prices end in 99 cents, which is a type of psychological pricing, and why the same product may have different prices in the same location, a phenomenon known as price dispersion. First, I test whether a model of inattentive consumers can explain why many, but not all, prices end in 99 cents. Data suggest the model can explain some of the variation in 99-cent price endings at the microeconomic level but generally fails at the macroeconomic level. I then address the puzzle of price dispersion by testing the empirical validity of the assumption that lower prices motivate search. I find that consumers who undertake additional shopping trips do not save much relative to average prices, which is at odds with many models of price dispersion. I also present jointly-written work proposing a model incorporating search and storage to explain observed behavior after splitting product-store pairs into high and low-priced bins. We show that price and quantity variation over time is lower for high-priced bins and also characterize the responsiveness of high-price bin quantity to lower-price bin price and quantity. In a broader context, these results guide how to refine models attempting to explain the existence of psychological pricing and price dispersion given the empirical deficiencies of existing theories.