The Consumer's Reservation Price as an Adaptive Aspiration Level

Reservation prices determine which goods consumers are willing to buy and, therefore, shape demand curves in markets. Neoclassical economics postulates that reservation prices optimally reflect the marginal utility provided by a good given all other possible uses of the consumer's budget, as well as a rational response to the information environment. In contrast, behavioral economics suggests that reservation prices are influenced by extraneous factors and are, thus, less stable and more difficult to predict. In this article, I propose a behavioral model of how the reservation price changes during sequential price searches. The model assumes bounded rationality, is rooted in the psychological theory of aspiration levels, and posits that the reservation price adjusts towards the lowest price known. A corollary is that when higher prices are charged in a market, consumers become willing to pay more in the short term. Results from an online laboratory experiment with more than 400 participants from the general population suggest that the model performs well in explaining the dynamics of the reservation price during a search spell. While the results imply that reservation prices are malleable, competition can protect consumers from sellers exploiting their adaptiveness.