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Pricing and Information Disclosure in Markets with Loss-Averse Consumers

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  • Peitz, Martin
  • Karle, Heiko

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.

Suggested Citation

  • Peitz, Martin & Karle, Heiko, 2010. "Pricing and Information Disclosure in Markets with Loss-Averse Consumers," CEPR Discussion Papers 7785, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7785
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    8. Karle, Heiko & Peitz, Martin, 2010. "Consumer Loss Aversion and the Intensity of Competition," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 319, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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    Cited by:

    1. 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;Society for the Advancement of Economic Theory (SAET), vol. 51(3), pages 695-711, November.
    2. , & ,, 2014. "Regular prices and sales," Theoretical Economics, Econometric Society, vol. 9(1), January.
    3. David Freeman, 2013. "Revealed Preference Foundations of Expectations-Based Reference-Dependence," Discussion Papers dp13-10, Department of Economics, Simon Fraser University.
    4. Huck, Steffen & Zhou, Jidong, 2011. "Consumer behavioural biases in competition: A survey," MPRA Paper 31794, University Library of Munich, Germany.

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    More about this item

    Keywords

    Advertising; Behavioral industrial organization; Imperfect competition; Information disclosure; Loss aversion; Price variation; Product differentiation; Reference-dependent utility;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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