In this paper we study the dynamic pricing strategies of a boundedly informed monopolist facing reference-dependent consumers. The monopolist is not aware of this behavioral feature of the consumers that is at the origin of the nonlinearity of an otherwise linear demand function. We identify the scenarios leading to a dynamic convergence to the optimizing strategy and at the same time we deepen the consequences of a failure in this process. In this way we are able to provide a behavioral explanation for the variability of prices and the high-low pricing strategy in monopolistic markets.
- Adaptive expectations
- Monopoly pricing
- Reference-dependent preferences