Economics of Deals and Optimal Pricing Policy

We expand on the work of Kahneman and Tversky and further develop the optimal pricing policy given a reference price that generates psychological effects. We suggest the possibility of the existence of an inter-temporal substitution effect, challenging the standard substitution effect which always points to a reverse relationship between current and future quantity demanded and price. The optimal pricing trajectories are developed for various possible interrelationships between the reference price and the actual price and their possible influence on customer behavior.