4 Scopus citations

Abstract

The existence of price thresholds in grocery retailing is well-documented. Most authors explain the existence of price thresholds using Assimilation-Contrast Theory, Adaptation Level Theory, or Prospect Theory. However, each of these theories is untenable if consumers are believed to behave rationally. We offer a theoretical explanation grounded in Real Options Theory (ROT) and economic hysteresis. We test the ROT hypothesis against three plausible alternatives using a maximum likelihood friction model that we augment for unobserved heterogeneity. Our findings support the ROT hypothesis, and suggest that the existence of price thresholds in aggregate data are driven by a common recognition of real option values, which do not disappear with the inclusion of consumer heterogeneity.

Original languageEnglish (US)
Pages (from-to)679-706
Number of pages28
JournalAmerican Journal of Agricultural Economics
Volume98
Issue number3
DOIs
StatePublished - Apr 1 2016

Keywords

  • Consumer search
  • hysteresis
  • real options
  • reference prices
  • retail prices
  • thresholds

ASJC Scopus subject areas

  • Agricultural and Biological Sciences (miscellaneous)
  • Economics and Econometrics

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