Psychological prices of branded foods and price rigidity : evidence from German scanner data

Abstract

There is increasing evidence from scanner data that branded foods in the grocery retailing sector contain a substantial amount of price rigidity (HERRMANN/MÖSER 2003). One of the many alternative explanations for price rigidity is the existence of psychological pricing points. The economic literature has been most hesitant against this theory and, in a survey, BLINDER et al. (1998) found no confirmation at all based on the views of business managers. In that study, however, retail trade is underrepresented. The theory of psychological pricing points continues to be an important concept for pricing in firms which directly sell to consumers. Empirical findings in various studies, e.g. in the early work by FRIEDMAN (1967) for food retailing, suggest that psychological prices are widely used in the retailing sector. Hence, it is the objective of this paper to elaborate to which extent psychological pricing plays a role in grocery retailing and whether it contributes to price rigidity of branded foods in Germany. The empirical analysis will be based on scanner data of weekly prices for 20 branded foods in Germany in the period 1996-99.