Price Points and Price Rigidity

Abstract

Although the existing literature in economics and marketing offers growing evidence on the use of price points, there is a lack of direct evidence on the link between price points and price rigidity. We examine this issue in the retail setting using two datasets. One is a large weekly transaction price dataset, covering 29 product categories over an eight-year period from a large US supermarket chain. The other is from the Internet, and includes daily prices over a two-year period for hundreds of consumer electronic products with a wide range of prices. Across the two datasets, we find that 9 is the most frequently used price-ending for the penny, dime, dollar and the ten-dollar digits. Exploring the relationship between price points and price rigidity in these datasets, we find that the most common price changes are in multiples of dimes, dollars, and tendollar increments. When we econometrically estimate the probability of a price change, we find that 9-ending prices are at least 24 percent (and as much as 73 percent) less likely to change in comparison to prices ending with other digits. We also find that the average size of change of 9-ending prices are systematically larger when they do change, in comparison to non 9-ending prices. This link between price points and price rigidity is remarkably robust across the wide variety of price levels, product categories, and retailers examined in this study. To make sense of these findings, we offer a behavioral explanation building on the emerging literature on rational inattention. We argue that consumers may find it rational to be inattentive to the rightmost digits of retail prices because of the costs of processing price information. In response, firms may find it profitable to set the rightmost digits at 9, and therefore, be rigid in their pricing around these price points. We conclude that price points are a significant source of retail price rigidity in our datasets, and that rational inattention can offer a plausible explanation for their presence.

Life could be so easy: the convenience effect of round price endings

“…First, of most importance is that our results challenge the marketing paradigm of the superiority of justbelow prices. For decades, retailing has almost exclusively relied on just-below prices (e.g., Levy et al 2011;Twedt 1965). However, we show that a more differentiated view of price endings is needed.…”

“…At the same time, contrary to the common 13.50 (1)*** 6.64 (2)** ***p≤.01; **p≤.05; *p≤.10. a Unstandardized path coefficients; standard errors in parentheses marketing practice of using just-below prices (Levy et al 2011;Schindler and Kirby 2007;Suri et al 2004), a current trend favors the use of round prices. In light of these circumstances, through four studies we assessed boundary conditions for the effectiveness of different price endings with a special focus on the role of convenience in shaping the effects of price endings and can now provide answers to our focal research questions.…”

“…Just-below prices dominate in Western retail (e.g., Levy et al 2011;Schindler et al 2011;Suri et al 2004;Twedt 1965), with round prices occasionally used to signal high quality (Parsa and Naipaul 2007;Schindler 2006;Stiving 2000). However, little empirical evidence supports this practice, and prior research on price endings has produced vastly differing results.…”

Convenient prices, cash payments and price rigidity

“…Convenient prices are round prices that usually match monetary denominations while price points are odd prices such as 9-ending prices (Knotek, 2008). Price points and convenient prices are of a significant importance because they are in turn accused of being one of the sources of price rigidity (Blinder et al, 1998;Kashyap, 1995;Knotek, 2011;Levy et al, 2011) which supposedly influences the monetary policy, the aggregate price level (Aoki, 2001;Carvalho, 2006) and the output (Nakamura and Steinsson, 2008).…”

“…1 In a first study, Levy et al (2011) relate price points to consumer behaviors. They argue that consumers ignore the rightmost digits of retail prices (consumer inattention) and then may offer a plausible explanation for the existence of price points.…”