Altruistic Dynamic Pricing with Customer Regret
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.
I wish to thank the Harvard Business School Division of Research for research support as well as Virgiliu Midrigan and seminar participants at the Kansas City Federal Reserve for comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Julio J. Rotemberg, 2010. "Altruistic Dynamic Pricing with Customer Regret," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 646-672, December. citation courtesy of