99: are retailers best responding to rational consumers? Experimental evidence

Abstract There exist numerous theories that attempt to explain the ubiquitous 99‐cent price ending. Most of these theories either do not hold up to inspection or posit irrational consumers who serve as a money pump for firms. We offer an experimental test of Basu's ( Econ. Lett. 1997; 54:41–44) rational expectations equilibrium model in which consumers are fully rational. We find partial support for Basu's model. Convergence to the 99‐cent equilibrium is faster and more widespread when firms are able to observe the previous pricing decisions of others. By imitating the optimal 99‐cent price endings of rational firms, less rational firms display an ‘as if’ rationality. Copyright © 2006 John Wiley & Sons, Ltd.