Price perception and confirmation bias in the context of a VAT increase

Abstract

This paper examines a potential confirmation bias in price perception in consequence to a real-world event and different explanations for such a confirmation bias. In a panel design conducted 2 months before and after a raise in value-added tax (VAT), 303 participants had to estimate the current prices for four products affected and four products not affected by this raise in VAT and the anticipated or recalled prices of these products. Before the VAT increase, an undifferentiated belief in strong future price increases was prevalent. After the VAT increase, a confirmation bias was found: in retrospect, participants reported price increases that were significantly higher than the official price development and in line with an undifferentiated belief in marked price increases. Two theoretical explanations for confirmation bias, i.e., the biased use of price information and the selective distortion of memory, fit the data.