Left-Digit Bias, Quality Choice, and Channel Coordination

Left-digit bias in price perception has been widely documented. We study how it affects firms’ joint pricing and quality choices. The bias increases quality at interior prices but decreases quality at 99-ending prices. At 99-ending price points, the bias discourages price adjustment, leading firms to absorb cost shocks through quality changes and thereby, contributing to shrinkflation (quality reductions with nominal prices held fixed). In channels, the bias can either exacerbate double marginalization via a prisoner’s dilemma or—because retailers are rigid at 99-ending prices—induce wholesale price adjustments that may strengthen coordination. When manufacturers choose quality, for empirically relevant bias magnitudes, the bias can generate 99-ending retail pricing and raise total channel profits; its coordination effects depend on whether the induced move to 99-ending prices is upward or downward. In decentralized channels, consumer surplus can sometimes increase alongside total channel profit.

This paper was accepted by Greg Shaffer, marketing.

Funding: X. Peng acknowledges the support from National Natural Science Foundation of China [72531009] and China Scholarship Council.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2025.00771.