659 - The Euro and Psychological Prices: Simulations of the Worst-Case Scenario

Wetenschappelijke publicatie
Date 1 July 2001

Currently, nearly 90% of all prices of consumer goods and services in the Netherlands are psychological, conveniently broken or round prices. After converting these ‘attractive’ guilder prices into euro using the official conversion rate, the resulting euro prices are generally not attractive. The Dutch public is concerned that retailers will not round their euro prices symmetrically upwards and downwards to the next attractive pricing point but only upwards? This paper investigates the question ‘What would be the effect on the consumer price index (CPI) if prices were systematically rounded upwards’. Firstly, the attractive pricing points are determined empirically using the actual price sample underlying the Dutch CPI. Secondly, different rounding scenarios are investigated and the likelihood of the worst-case scenario is discussed. It turns out that the euro introduction may cause an increase of the CPI by 0.7% at most. However, due to competition in the retail sector, this scenario is very unlikely. Keywords: Euro, inflation, psychological prices, consumer price index