99: Are Retailers Best Responding to Rational Consumers? Experimental Evidence

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 (1997) rational expectations equilibrium model, an economic model of the phe-nomenon in which consumers are fully rational. We find ample 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