Jarrod Burgh, Emerson Melo, Matthew Shum · 2026 · arXiv (Cornell University)
DOI: 10.48550/arxiv.2610.12587 · cited by 0 works (OpenAlex) · open-access PDF
Mental accounting is usually explained by self-control, and two-stage budgeting by separable preferences. We propose a third explanation based on sellers' market power. A consumer who commits to spend a fixed number of dollars in a category has unit-elastic demand, so a seller in that category gains nothing by restricting quantity. A consumer who instead targets a fixed physical quantity has perfectly inelastic demand, a case that a monopolist can exploit. We characterize the commitments that remove a seller's incentive to mark up prices, and show that the fixed dollar budget is the least restrictive. We then show that what matters is budget rigidity rather than separability of preferences. A consumer who re-optimizes her category budget when prices change is insulated from market power only if categories are substitutes; a rigid budget insulates her in every case. Mental accounting can therefore be read as a commitment device against markups, a rationale that is separate from the self-control motive in the existing literature.
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Topics: Mental accounting, Economics, Liberian dollar, Incentive, Budget constraint, Microeconomics
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