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Pricing and Information Disclosure in Markets with Loss-Averse Consumers

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  • Karle, Heiko
  • Peitz, Martin

Abstract

We develop a theory of imperfect competition with loss-averse consumers. All consumers are fully informed about match value and price at the time they make their purchasing decision. However, a share of consumers are initially uncertain about their tastes and form a reference point consisting of an expected match value and an expected price distribution, while other consumers are perfectly informed all the time. We derive pricing implications in duopoly with asymmetric firms. In particular, we show that a market may exhibit more price variation the larger the share of uninformed, loss-averse consumers. We also derive implications for firm strategy and public policy concerning firms’ incentives to inform consumers about their match value prior to forming their reference point.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7785.

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Date of creation: Apr 2010
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Handle: RePEc:cpr:ceprdp:7785

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Related research

Keywords: Advertising; Behavioral Industrial Organization; Imperfect Competition; Information Disclosure; Loss Aversion; Price Variation; Product Differentiation; Reference-Dependent Utility;

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References

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  1. Armstrong, Mark & Chen, Yongmin, 2007. "Inattentive Consumers and Product Quality," MPRA Paper 4797, University Library of Munich, Germany.
  2. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  3. Kfir Eliaz & Ran Spiegler, 2004. "Contracting with Diversely Naïve Agents," Levine's Bibliography 122247000000000530, UCLA Department of Economics.
  4. Maarten C. W. Janssen & José Luis Moraga-González, 2004. "Strategic Pricing, Consumer Search and the Number of Firms," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1089-1118, October.
  5. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-68, September.
  6. Zhou, Jidong, 2008. "Reference Dependence and Market Competition," MPRA Paper 9370, University Library of Munich, Germany.
  7. Michael D. Grubb, 2006. "Selling to Overconfident Consumers," Discussion Papers 06-018, Stanford Institute for Economic Policy Research.
  8. Anderson, Simon P & Renault, Regis, 2000. "Consumer Information and Firm Pricing: Negative Externalities from Improved Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 721-42, August.
  9. Paul Wachtel & Rainer Haselmann, 2007. "Risk Taking by Banks in the Transition Countries," Working Papers 07-18, New York University, Leonard N. Stern School of Business, Department of Economics.
  10. repec:bla:restud:v:73:y:2006:i:3:p:689-714 is not listed on IDEAS
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Citations

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Cited by:
  1. Heidhues, Paul & Koszegi, Botond, 0. "Regular prices and sales," Theoretical Economics, Econometric Society.
  2. Ran Spiegler, 2012. "Monopoly pricing when consumers are antagonized by unexpected price increases: a “cover version” of the Heidhues–Kőszegi–Rabin model," Economic Theory, Springer, vol. 51(3), pages 695-711, November.
  3. Steffen Huck & Jidong Zhou, 2011. "Consumer Behavioural Biases in Competition: A Survey," Working Papers 11-16, New York University, Leonard N. Stern School of Business, Department of Economics.

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