When a boundedly rational monopolist meets consumers with reference dependent preferences

Since the pioneering works of Daniel ( Kahneman and Tversky, 1979; Tversky and Kahneman, 1992 ), cognitive limitations of human beings struggling with economic and financial decisions have been deeply investigated through experiments both in the lab and in the field. Now we know that people rely in simple heuristics to simplify complicated problems and taking decisions (see ( Thaler, 2016 ) for a recent survey and future perspectives). An interesting strand of theoretical research concerns the study of imperfect markets where, on the demand side, con 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. ? 2021 Elsevier B.V. All rights reserved. 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.