SMU SOE Seminar (February 24, 2023): Price Saliency and Fairness: Evidence from Regulatory Shaming

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TOPIC:

PRICE SALIENCY AND FAIRNESS: EVIDENCE FROM REGULATORY SHAMING

ABSTRACT When consumers realize that they pay more than other consumers for the same product, how do firms and consumers respond? We study the effects of a regulation that required Israeli retailers to display on-the-shelf signs showing the (cheap) international price of products alongside the price of the very same products in the local store. We find that prices fell on average by 8%, and that the more expensive the local products were compared to their international counterparts, the more their prices fell. We further show that quantities increased after prices fell, although these increases were significantly smaller than increases predicted based on pre-regulation demand elasticities and price drops. Moreover, the products that remained more expensive exhibited larger differences between predicted and actual quantities. To explain these findings, we develop a model that incorporates the role of salient unfair prices. We also estimate the model and find that from a consumer point of view, a 1\% decrease in a product's sale price is equivalent to a 20 percentage points increase in the international price of that product. Also, consumer welfare decreased for some products, although consumption increased. This happens when the disutility from observing that other consumers paid less exceeded the added utility from increased consumption. We discuss the implications of our findings for optimal pricing strategies and theoretical models of salient thinking. Keywords: saliency, fairness, bottom-up attention, contrast, uniform pricing, retail. JEL Codes: D0, D4, D90, L81 Click here to view the CV. Click here to view the paper.
		PRESENTER Itai Ater Tel Aviv University
		RESEARCH FIELDS Applied Microeconomics Industrial Organization Behavioral Economics Real-estate
		DATE: 24 February 2023 (Friday)
		TIME: 4pm - 5.30pm
		VENUE: Meeting Room 5.1, Level 5 School of Economics Singapore Management University 90 Stamford Road Singapore 178903

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