A MODEL FOR THE EFFECTS OF PSYCHOLOGICAL PRICING IN GABOR-GRANGER PRICE STUDIES

We present a model of consumers' price sensitivity that explicitly dea ls with the existence of so-called psychological price levels or odd p rices, i.e. prices ending in an odd number. The model is formulated in a latent class framework, in which splines are used to model utility as a function of prices in consumer segments. The knots in the splines represent psychological prices. Additionally, the model allows for in ferences on price expectations and the role of price as an indicator o f quality. The model is tailored to the analysis of so-called Gabor-Gr anger price experiments. We provide an empirical application to the an alysis of a Gabor-Granger study, and investigate the performance of ou r model relative to a competing model. (C) 1998 Elsevier Science B.V. All rights reserved.