Pricing strategy in the presence of reference prices with thresholds

Reference price models allow for the explicit incorporation of inter‐temporal effects of pricing decisions. We introduce a reference price model with thresholds within which there are no reference effects. For frequently purchased items such as groceries, a pricing action in this period may affect demand in this period and in the next period, and reference price models build that effect into an expected price. Previous reference models have been structurally limited to either single‐price or cyclical price strategies but not both. The incorporation of thresholds allows for both types of pricing strategies, depending on the specific parameters for the model. We investigate the conditions under which a price cycles and those under which a single price is optimal. We also present propositions for the reduction of the search space to improve computational performance and present results of computational experiments to highlight key results. Understanding the nature of the product demand can help managers develop pricing strategies that maximize their profits.