Working Paper: CEPR ID: DP17156
Authors: Itai Ater; Avishay Rizi
Abstract: What are the effects of attention to the price paid by other consumers on consumer demand and firms' pricing decisions? We study the effects of a regulation that required Israeli retailers to display on-the-shelf signs indicating the (cheap) international price of a product alongside the price of that product in the local store. We find that prices of products included in the regulation fell on average by 8%. The price drop was larger for products that were initially more expensive compared to their international price. Following the price drop, quantities sold increased. Yet, these increases were significantly smaller than increases in quantities that we predict based on pre-regulation demand elasticities and the actual price drops. Products that remained relatively expensive vis-a-vis their international price exhibited larger differences between predicted and actual quantities sold. We develop a theoretical model that explains these findings, and estimate it to quantify the importance of salient unfair prices. We find that a 20 percentage-point salient difference between local and international prices is equivalent to a 1% increase in the price of the local product itself. Next, we use the model and its estimated parameters to calculate the impact of the regulation on consumer utility. We find that utility declined for some products included in the regulation. This happens when the disutility from observing that other consumers pay less exceeds the added utility from reduced prices and increased consumption. We discuss potential implications of our findings for optimal pricing strategies, price rigidity, and theoretical models of salient thinking.
Keywords: saliency; fairness; attention; uniform pricing; retail
JEL Codes: D0; D4; D90; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Salient difference between local and international prices (F49) | Consumer Demand Response (D12) |
| Regulation mandating the display of international prices (F14) | Consumer Utility Impact (D11) |
| Consumer Utility Impact (D11) | Consumer Demand Response (D12) |
| Regulation mandating the display of international prices (F14) | Price Reduction (D49) |
| Price Reduction (D49) | Consumer Demand Response (D12) |
| Price Reduction (D49) | Consumer Demand Response (predicted) (R22) |