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Investment in product experimentation when consumers are loss averse

Author

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  • Aldo Pignataro

    (ARERA)

Abstract

I investigate the equilibrium outcomes of a game in which a monopolist sells to loss averse consumers, who are uncertain about their tastes for the product on sale. To resolve valuation uncertainty, the monopolist can invest in product experimentation, to improve the customers' purchasing decision. I characterize the optimal monopolist's price and investment in product experimentation. The analysis suggests that, to maximize social welfare, public authorities should force the fi rm to allow product experimentation for intermediate degrees of consumer loss aversion.

Suggested Citation

  • Aldo Pignataro, 2019. "Investment in product experimentation when consumers are loss averse," Economics Bulletin, AccessEcon, vol. 39(3), pages 1833-1843.
    • Handle: RePEc:ebl:ecbull:eb-19-00485
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2019/Volume39/EB-19-V39-I3-P171.pdf
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    References listed on IDEAS

    as
    1. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
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    3. Hahn, Sunku, 2005. "Allowing a pre-purchase product trial in duopoly," Economics Letters, Elsevier, vol. 87(2), pages 175-179, May.
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    6. Piccolo, Salvatore & Pignataro, Aldo, 2018. "Consumer loss aversion, product experimentation and tacit collusion," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 49-77.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Loss Aversion; Reference Point; Product Experimentation;
    All these keywords.

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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