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Keywords Pricing strategy, Estimating, Consumer behaviour
Abstract Although findings have been somewhat inconsistent, there is evidence from both experimental studies and field research that prices set just below the nearest round figure produce higher than expected demand at that level. Among the different explanations that have been proposed for these effects are that consumers round prices down, encode prices from left to right, remember only the "most important" digits of a price, and/or attach certain "images" to nine-ending prices. Utilizing a unique experimental setting, the author examines dollar vs cents digit recall as well as the choice frequencies associated with zero- vs nine-ending prices to determine the efficacy of the proposed explanations. Within this setting, the author concludes that left-to-right digit encoding may be a necessary condition for higher than expected demand.
Introduction
The use of odd-ending prices (e.g. pricing an item at $19.99 rather than $20.00) is extremely common in retail settings (Twedt, 1965; Schindler, 1984). In fact the practice of odd pricing in retailing is so widespread that its efficacy is generally taken for granted (Gendall et al., 1997). The underlying assumption of odd pricing is that prices set just below the nearest round figure produce higher-than-expected demand at that level. This means that the purchase probabilities for "just-below" prices lie well to the right of the estimated demand curves, producing a kink in the demand curves at these points.
Although results have been somewhat inconsistent across product categories, there is evidence from both experimental studies (e.g. Gendall et al., 1997) as well as field research (e.g. Stiving and Winer, 1997) that higher-than-- expected demand may occur at nine-ending just-below price points. Researchers have developed sophisticated models to estimate the specific levels) of this higher-than-expected demand (Kalyanam and Shively, 1998). In addition, researchers have demonstrated that the use of nine-ending prices may result in increased profit contribution (Gedenk and Sattler, 1999). While there is evidence of higher-than-expected demand at prices just below round numbers, however, the various explanations proposed in the literature in support of this evidence have met with mixed results. One reason is that because the proposed underlying cognitive processes behind these effects are, in most cases, inherently innate under normal stimuli exposure conditions, they may be difficult to manipulate...