Limited Memory Consumers and Price Dispersion
Published online: 8 February 2015
Ó Springer Science+Business Media New York 2015
Abstract We examine the effects of limited consumer memory on the pricing
strategies of competing ﬁrms. We show that when the valuations of consumers are
heterogeneous, it is possible to observe price dispersion even when each ﬁrm
charges a single price.
Keywords Bounded rationality Á Categorization Á Limited memory Á Price
A traditional assumption in the literature on imperfect competition is that consumers
have perfect information about available prices. Hence, the consumers are able to
recall the prices that they encountered during the search process. In a variety of
interesting cases this assumption can be strong.
Previous research suggests that
many consumers do not remember the price of a product that they just bought and
often claim that the price was not an important input in their purchase decision
(Wakeﬁeld and Inman 1993). However, they can tell whether the price of a product
is expensive or not. This suggests that, faced with memory constraints, consumers
make their decisions using heuristics that help them to process the information on
L. Kutlu (&)
School of Economics, Georgia institute of Technology, Atlanta, GA 30332-0615, USA
See Alba et al. (1991) for a survey regarding the effect of memory on consumer choice. See also
Dickson and Sawyer (1990) and Monroe and Lee (1999) for papers on the effects of imperfect short-term
memory on prices.
Rev Ind Organ (2015) 46:349–357