POSTPONED: Price norms and consumer behaviour

Seminar cancelled to be rescheduled in 2022.

We examine how consumers’ decisions are shaped by their past experiences as well as by contextual cues. Using data from a large UK retailer, including an experiment that exogenously varied prices, we find that the history of prices faced by individual consumers matters for choice: the consumer is more likely to buy at a given price the higher the prices seen previously. Building on a model where past prices retrieved from memory form a norm relative to which current prices are assessed, we develop new predictions: contextual cues, such as similar goods being on sale, affect memory retrieval, price norms and choice. Demand is inelastic for moderate departures from the (individual-specific) experienced prices but is highly elastic for large price movements. These predictions are confirmed in the data, and help explain puzzling patterns of aggregate demand.