IBD Salle 21
AMU - AMSE
5-9 boulevard Maurice Bourdet
Gaëtan Fournier: gaetan.fournier[at]univ-amu.fr
Yevgeny Tsodikovich: evgeny.tsodikovich[at]univ-amu.fr
This paper proposes a model of price-setting based on behavioral biases as those introduced by Kahneman and Tversky’s (1979) Prospect Theory: i) people evaluate different aspects of their choices separately (narrow bracketing); ii) people evaluate prospective outcomes relative to a reference point (reference dependence); iii) prospective losses loom larger than prospective gains (loss aversion). The model predicts a pricing rule that involves an inaction region, and replicates two well-established patterns of the microdata: i) The distribution of price changes has both small and large values, and ii) the hazard function of price changes is downward-sloping initially and becomes constant thereafter.