TY  - JOUR
AU  - Rotemberg,Julio J.
TI  - Altruistic Dynamic Pricing with Customer Regret
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14933
PY  - 2009
Y2  - April 2009
UR  - http://www.nber.org/papers/w14933
L1  - http://www.nber.org/papers/w14933.pdf
N1  - Author contact info:
Julio J. Rotemberg
Graduate School of Business
Harvard University, Morgan Hall
Soldiers Field
Boston, MA  02163
Tel: 617/495-1015
Fax: 617/496-5994
E-Mail: jrotemberg@hbs.edu
AB  - A model is considered where firms internalize the regret costs that consumers experience when they see an unexpected price change.  Regret costs are assumed to be increasing in the size of price changes and this can explain why the size of price increases is less sensitive to inflation than in models with fixed costs of changing prices. The latter predict unrealistically large responses of price changes to inflation for firms that do not frequently reduce their prices. Adjustment costs that depend on the size of price changes also raise the variability on the size of price increases. Lastly, it is argued that the common practice of announcing price increases in advance is much easier to rationalize with regret concerns by consumers than with more standard approaches to price rigidity.
ER  -