Monopoly pricing when consumers are antagonized by unexpected price increases: a “cover version” of the Heidhues–Kőszegi–Rabin model
This paper reformulates and simplifies a recent model by Heidhues and Kőszegi (The impact of consumer loss aversion on pricing, Mimeo, 2005 ), which in turn is based on a behavioral model due to Kőszegi and Rabin (Q J Econ 121:1133–1166, 2006 ). The model analyzes optimal pricing when consumers are loss averse in the sense that an unexpected price hike lowers their willingness to pay. The main message of the Heidhues–Kőszegi model, namely that this form of consumer loss aversion leads to rigid price responses to cost fluctuations, carries over. I demonstrate the usefulness of this “cover version” of the Heidhues–Kőszegi-Rabin model by obtaining new results: (1) loss aversion lowers expected prices; (2) the firm’s incentive to adopt a rigid pricing strategy is stronger when fluctuations are in demand rather than in costs. Copyright Springer-Verlag 2012
Volume (Year): 51 (2012)
Issue (Month): 3 (November)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/economics/economic+theory/journal/199/PS2|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Courty, Pascal & Pagliero, Mario, 2007.
"Price Variation Antagonism and Firm Pricing Policies,"
CEPR Discussion Papers
6663, C.E.P.R. Discussion Papers.
- Courty, Pascal & Pagliero, Mario, 2010. "Price variation antagonism and firm pricing policies," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 235-249, August.
- Pascal Courty & Mario Pagliero, 2006. "Price Variation Antagonism and Firm Pricing Policies," Economics Working Papers ECO2006/27, European University Institute.
- Pascal Courty & Mario Pagliero, 2010. "Price Variation Antagonism and Firm Pricing Policies," Post-Print hal-00840230, HAL.
- Pascal Courty & Mario Pagliero, 2008. "Price Variation Antagonism and Firm Pricing Policies," Economics Working Papers ECO2008/02, European University Institute.
- Gadi Fibich & Arieh Gavious & Oded Lowengart, 2007. "Optimal price promotion in the presence of asymmetric reference-price effects," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 569-577.
- Botond Koszegi & Matthew Rabin, 2005.
"A Model of Reference-Dependent Preferences,"
784828000000000341, UCLA Department of Economics.
- Botond Koszegi & Matthew Rabin, 2004. "A Model of Reference-Dependent Preferences," Method and Hist of Econ Thought 0407001, EconWPA.
- Koszegi, Botond & Rabin, Matthew, 2004. "A Model of Reference-Dependent Preferences," Department of Economics, Working Paper Series qt0w82b6nm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Rani Spiegler, 2005.
"The Market for Quacks,"
784828000000000634, UCLA Department of Economics.
- Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
- Osborne, M-J & Rubinstein, A, 1997.
"Games with Procedurally Rational Players,"
4-97, Tel Aviv.
- 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.
- Spiegler, Ran, 2014.
"Bounded Rationality and Industrial Organization,"
Oxford University Press, number 9780199334261, June.
- Ernst Fehr & Lorenz Goette & Christian Zehnder, 2009.
"A Behavioral Account of the Labor Market: The Role of Fairness Concerns,"
Annual Review of Economics,
Annual Reviews, vol. 1(1), pages 355-384, 05.
- Ernst Fehr & Lorenz Goette & Christian Zehnder, 2008. "A behavioral account of the labor market: the role of fairness concerns," IEW - Working Papers 394, Institute for Empirical Research in Economics - University of Zurich.
- Fehr, Ernst & Götte, Lorenz & Zehnder, Christian, 2008. "A Behavioral Account of the Labor Market: The Role of Fairness Concerns," IZA Discussion Papers 3901, Institute for the Study of Labor (IZA).
- Heidhues, Paul & Köszegi, Botond, 2005.
"The Impact of Consumer Loss Aversion on Pricing,"
CEPR Discussion Papers
4849, C.E.P.R. Discussion Papers.
- Karle, Heiko & Peitz, Martin, 2010.
"Pricing and Information Disclosure in Markets with Loss-Averse Consumers,"
Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems
312, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Karle, Heiko & Peitz, Martin, 2010. "Pricing and Information Disclosure in Markets with Loss-Averse Consumers," CEPR Discussion Papers 7785, C.E.P.R. Discussion Papers.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:51:y:2012:i:3:p:695-711. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.