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Loss aversion and the uniform pricing puzzle for media and entertainment products

Author

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  • Pascal Courty

    (University of Victoria)

  • Javad Nasiry

    (Hong Kong University of Science and Technology)

Abstract

The uniform pricing puzzle for vertically differentiated media and entertainment products (movies, books, music, mobile apps, etc.) is that a firm with market power sells high- and low-quality products at the same price even though quality is perfectly observable and price adjustments are not costly. We resolve this puzzle by assuming that consumers have an uncertain taste for quality and accounting for consumer loss aversion in monetary and consumption utilities. The novelty of our approach is that the so-called reference transaction is endogenously set as part of a “personal equilibrium” and is based only on past purchases of same-quality products.

Suggested Citation

  • Pascal Courty & Javad Nasiry, 2018. "Loss aversion and the uniform pricing puzzle for media and entertainment products," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(1), pages 105-140, July.
    • Handle: RePEc:spr:joecth:v:66:y:2018:i:1:d:10.1007_s00199-017-1055-y
    DOI: 10.1007/s00199-017-1055-y
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    6. Jordi McKenzie, 2023. "The economics of movies (revisited): A survey of recent literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 480-525, April.
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    More about this item

    Keywords

    Uniform pricing puzzle; Vertically differentiated products; Expectations-based loss aversion; Personal equilibrium;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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