More Than a Penny's Worth: Left-Digit Bias and Firm Pricing.

This article investigates the phenomenon of left-digit bias—the consumer tendency to perceive prices just below a round number (e.g., $4.99) as significantly lower than the round number itself (e.g., $5.00)—and its implications for retail pricing strategies in U.S. supermarket chains. Using scanner data on approximately 3,500 products sold by twenty-five chains, the study structurally estimates a substantial left-digit bias among consumers and models optimal pricing responses to this bias. While firms do employ ninety-nine-ending prices consistent with left-digit bias, their pricing behavior systematically underestimates the magnitude of the bias and deviates from profit-maximizing strategies, often relying on heuristics or partial incorporation of the bias. This mispricing leads to an estimated 1–4% loss in potential gross profits for retailers, with ambiguous effects on consumer surplus, highlighting that even large firms may not fully optimize pricing in the presence of behavioral consumer biases.