Asymmetric demand responses to price changes are not an observable implication of classical demand theory, which predicts that consumers will react to a small price increase in much the same way as they do to a small price decrease. Yet applied researchers have long speculated that consumers are more sensitive to price increases than they are to price decreases. In addition, recent empirical studies generally support the theory of asymmetric demand responses. We construct a dynamic model based on data gathered from monthly telephone bills for 128 New York Telephone customers over a five-year period. Our results support the conclusion that customers react more quickly and strongly when prices go up than they do when prices go down.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Price excludes VAT (USA)
Tax calculation will be finalised during checkout.
Bell, D.R., and J.M. Lattin. 1993. “Loss Aversion and Heterogeneity in Price Sensitivity.” Working Paper, Graduate School of Business, Stanford University (May).
Consumer Federation of America, American Federation of Retired Persons, and American Telephone and Telegraph. 1987. Joint telecommunications project. As presented at the Annual Assembly of the Consumer Federation of America (February 12).
Delia Bitta, A., and K. Monroe. 1974. “The Influence of Adaptation Levels of Subjective Price Perceptions.” InAdvances in Consumer Research. Vol. 1., edited by Scott Ward and Peter Wright. Urbana, IL: Association for Consumer Research.
Doherty, Noel, and Gerald M. Oscar. 1977. “Will the Rates Produce the Revenues?”Public Utilities Fortnightly 99(10): 15–23.
Doob, A., J. M. Carlsmith, J. Freedman, T. Landauer, and T. Soleng. 1969. “Effect of Initial Selling Price on Subsequent Sales.”Journal of Personality and Social Psychology 11: 345–350.
Gurumurthy, K. and John D.C. Little. 1989. “A Price Response Model Developed from Perceptual Theories.” Working Paper #3038-89, M.I.T. Sloan School of Management (June).
Hanemann, W. Michael. 1991. “Willingness To Pay and Willingness To Accept: How Much Can They Differ?”American Economic Review 81(3): 635–647.
Hardie, Bruce G.S., Eric J. Johnson, and Peter S. Fader. 1992. “ Modeling Loss Aversion and Reference Dependence Effects on Brand Choice.” Working Paper, The Wharton School, University of Pennsylvania (December).
Hausman, J.A. (ed.). 1993.Contingent Valuation: A Critical Assessment. Amsterdam: North-Holland.
Kahneman, Daniel and Amos Tversky. 1979. “Prospect Theory: An Analysis of Decision Under Risk.”Econometrica 97: 263–291.
Kahneman, Daniel, Jack L. Knetsch and Richard H. Thaler. 1990. “Experimental Tests of the Endowment Effect and the Coase Theorem.”Journal of Political Economy 98(6): 1325–1348.
Kalwani, Manohar U., Chi Kin Yim, Keikki J. Rinne, and Yoshi Sugita. 1990. “The Price Expectations Model of Customer Brand Choice.”Journal of Marketing Research 27 (August): 251–62.
Malinvaud, E. 1966.Statistical Methods of Econometrics. Amsterdam: North Holland.
Putler, Daniel. 1992. “Incorporating Reference Price Effects into a Theory of Consumer Choice.”Marketing Science 11(3) (Summer): 287–309.
Raman, Kalyan and Frank Bass. 1993. “A General Test of Reference Price Theory in the Presence of Threshold Effects.” Working Paper, College of Business Administration, University of Florida (June).
Thaler, Richard H. 1991.Quasi-Rational Economics. New York: Russell Sage Foundation.
Tversky, Amos and Daniel Kahneman. 1991. “Loss Aversion in Riskless Choices: A Reference-Dependent Model.”Quarterly Journal of Economics 111(4): 1039–1061.
Varian, Hal. 1984.Microeconomic Analysis. New York: Norton.
Zona, J.D., and P. Schaeffer. 1988. “Two Stage Budgeting and the Total Bill Effect: An Application to AT&T's Inter -and Intra-State Long Distance Market.” Presented at the Bellcore/Bell Canada Industry Forum, Key Biscayne, Florida (January).
We would like to thank Manny Haas and Bernie Reddy for their comments and suggestions.
Rights and permissions
About this article
Cite this article
Bidwell, M.O., Wang, B.X. & Zona, J.D. An analysis of asymmetric demand response to price changes: The case of local telephone calls. J Regul Econ 8, 285–298 (1995). https://doi.org/10.1007/BF01070810
- Empirical Study
- Public Finance
- Price Change
- Industrial Organization
- Price Increase