Why do so many prices end in .99?

Via Tim Harford, there is a new paper on this topic, by Franz Hackl, Michael E. Kummer, and Rudolf Winter-Ebmer:

Basu (2006) argues that the prevalence of 99 cent prices in shops can be explained with rational consumers who disregard the rightmost digits of the price. This bounded rational behaviour leads to a Bertrand equilibrium with positive markups. We use data from an Austrian price comparison site and  results highly compatible with Basu's theory. We can show that price points – in particular prices ending in 9 – are prevalent and have signicant impact on consumer demand. Moreover, these price points are sticky; neither the price-setter itself wants to change them neither the rivals do underbid these prices, if they represent the cheapest price on the market.

Tim's piece on the same question can be found here.


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