Price Points and Price Rigidity*
Daniel Levy**
Bar-Ilan University
Levyda@mail.biu.ac.il
Dongwon Lee
University of Minnesota
dlee@csom.umn.edu
Haipeng (Allan) Chen
University of Miami
hchen@miami.edu
Robert J. Kauffman
University of Minnesota
rkauffman@csom.umn.edu
Mark Bergen
University of Minnesota
mbergen@csom.umn.edu
Last revision: April 15, 2006
JEL Codes: E12, E31, L16, D80, M21, M30
Key Words: Price Points, 9-Ending Prices, Price Rigidity, Rational Inattention, Retail Pricing,
E-Commerce
* We are grateful to Jurek Konieczny, the discussant at the 2003 Central European University Conference on “Microeconomic Pricing and the
Macroeconomy” for constructive comments. We thank the conference participants and especially Julio Rotemberg for insightful conversations,
and Andrzej Baniak, Marco Bonomo, Alan Kackmeister, Attila Ratfai, Harald Stahl, Christoph Weiss, Jonathan Willis and Alex Wolman for
suggestions. Gershon Alperovich, Bob Barsky, Leif Danziger, and Jacob Paroush provided helpful comments. Portions of this work have been
also presented at the 2004 INFORMS Conference on Information Systems and Technology in Denver, the 2004 International Conference on
Systems Science in Washington, DC, the 2005 IS Research Symposium, the 2005 Maryland Symposium on Statistical Challenges in ECommerce, the 2005 AMCIS Doctoral Consortium, and at the 2005 INFORMS Marketing Science Conference. We thank Chris Forman, Hemant
Bhargava, D.J. Wu, Barrie Nault, Fred Riggins, Sri Narasimhan, Rahul Telang, Sunil Milthas, and other conference participants for helpful
suggestions. Finally, we thank the seminar participants at Bar-Ilan University, European Central Bank, and the Departments of Marketing as well
as Information and Decision Sciences at the University of Minnesota for comments, Manish Aggrawal, Ning Liu, and Avichai Snir for research
assistance, and the University of Chicago and Dominick’s for data. Some parts of this manuscript were completed at the Monetary Policy and
Research Division, at the Research Department of the European Central Bank, where Daniel Levy was a visiting scholar. He is grateful to the
ECB Research Department members, and its management for the hospitality. Dongwon Lee’s research is supported by an eBRC Doctoral
Support Award from Pennsylvania State University and the MIS Research Center at University of Minnesota. Rob Kauffman acknowledges
partial support from the MIS Research Center. All authors contributed equally: we rotate co-authorship. The usual disclaimer applies.
** Corresponding author: Daniel Levy, Department of Economics, Bar-Ilan University, Ramat-Gan 52900, ISRAEL. Tel: + 972-3-531-8331,
Fax: + 972-3-535-3180, Email: Levyda@mail.biu.ac.il.
Price Points and Price Rigidity
Abstract
Although the existing literature in economics and marketing offers growing evidence on the use
of price points, there is a lack of direct evidence on the link between price points and price
rigidity. We examine this issue in the retail setting using two datasets. One is a large weekly
transaction price dataset, covering 29 product categories over an eight-year period from a large
US supermarket chain. The other is from the Internet, and includes daily prices over a two-year
period for hundreds of consumer electronic products with a wide range of prices. Across the two
datasets, we find that 9 is the most frequently used price-ending for the penny, dime, dollar and
the ten-dollar digits. Exploring the relationship between price points and price rigidity in these
datasets, we find that the most common price changes are in multiples of dimes, dollars, and tendollar increments. When we econometrically estimate the probability of a price change, we find
that 9-ending prices are at least 24 percent (and as much as 73 percent) less likely to change in
comparison to prices ending with other digits. We also find that the average size of change of 9ending prices are systematically larger when they do change, in comparison to non 9-ending
prices. This link between price points and price rigidity is remarkably robust across the wide
variety of price levels, product categories, and retailers examined in this study. To make sense of
these findings, we offer a behavioral explanation building on the emerging literature on rational
inattention. We argue that consumers may find it rational to be inattentive to the rightmost digits
of retail prices because of the costs of processing price information. In response, firms may find
it profitable to set the rightmost digits at 9, and therefore, be rigid in their pricing around these
price points. We conclude that price points are a significant source of retail price rigidity in our
datasets, and that rational inattention can offer a plausible explanation for their presence.