Group for Research in Decision Analysis

Oligopoly Pricing with Reference-Price Effects

Paola Labrecciosa Monash University, Australia

In this paper, we study how the psychology of consumers toward price, in particular, the presence of reference-price effects, impacts on firms' pricing behaviour in oligopolistic industries. We propose an infinite-horizon differential game between price-setting firms in which consumers have memory of past prices and are inclined to human decision-making biases. We derive open-loop, closed-loop (feedback), and EDLP (every day low price) strategies and compare and contrast them under the assumption that the speed of adjustment of the reference price is either finite or goes to infinity.