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A paradoxical risk aversion effect on the consumers’ demand for quality

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  • David BARDEY

    (Gremaq, Université Toulouse 1)

Abstract

In this article, we consider a demand model for a durable good with unknown quality. The quality of the good is uncertain in the sense that the consumer ignores (ex ante) whether the good will break down or not, higher quality implying a higher probability of survival. Taking into account this uncertainty around the quality, we show that the demand for quality can, paradoxically, decrease when consumers are more risk averse. We prove that this risk aversion effect can disturb the second-order price discrimination policies applied by some firms. We reveal the link between quality demand and self-protection theory.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2004015.

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Length: 8
Date of creation: 01 Mar 2004
Date of revision:
Handle: RePEc:ctl:louvre:2004015

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Related research

Keywords: Vertical differentiation; Risk aversion; Self-protection;

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References

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  1. Isabel GRILO & Xavier WAUTHY, 2000. "Price Competition when Product Quality is Uncertain," Discussion Papers (REL - Recherches Economiques de Louvain), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 2000043, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  2. Kala Krishna & Tor Winston, 2003. "If at First You Don't Succeed: Profits, Prices, and Market Structure in a Model of Quality with Unknowable Consumer Heterogeneity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 573-597, 05.
  3. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, Elsevier, vol. 18(2), pages 301-317, August.
  4. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  5. Kihlstrom, Richard E. & Mirman, Leonard J., 1974. "Risk aversion with many commodities," Journal of Economic Theory, Elsevier, Elsevier, vol. 8(3), pages 361-388, July.
  6. Eeckhoudt, L. & Godfroid, Ph. & Gollier, C., 1997. "Willingness to pay, the risk premium and risk aversion," Economics Letters, Elsevier, Elsevier, vol. 55(3), pages 355-360, September.
  7. DIONNE, George & EECKHOUDT, Louis, . "Self-insurance, self-protection and increased risk aversion," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -623, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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