Pricing Waves: Exploring Bounded Rationality in Price Setting

The paper aims at developing a theoretical framework designed to explain and empirically model the pricing behaviour of companies in competitive markets with differentiated products. The study addresses the limiting assumptions of classical rational choice models by incorporating the concept of bounded rationality, which is in this case reflected in price rigidity and hierarchical decision-making process regarding pricing by companies. In this regard, a concept of "pricing waves" is introduced, using the method of scientific analogy with physics to describe market dynamics. The research structures the pricing decisions into three pillars: strategic (setting the regular price, representing the wave direction), operational (determining the frequency and depth of discounts, corresponding to wavelength and amplitude), and tactical (short-term price adjustments due to market fluctuations, competitor activities, etc.). This structure illustrates how firms operate under internal constraints, balancing long-term positioning with immediate market objectives. The theoretical framework was empirically tested using weekly retail distribution audit data from the premium whiskey category in Ukraine (2018–2021). The analysis supported the idea that pricing strategies of top brands exhibit distinct cyclical components. Moreover, it was estimated that market players typically maintain relatively stable operational pricing parameters for periods of 12–13 or 25 weeks, implying that firms review their pricing principles 2–4 times per year. Furthermore, the study hypothesises that consumers, due to rational inattention, base their decisions on perceived pricing patterns (similar to the wave parameters) rather than solely on spot prices. The proposed approach potentially offers a toolkit for empirical modelling of demand and analysing market equilibrium, specifically taking into account the interference of competitors' pricing strategies (pricing waves).