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
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 51 (2012)
Issue (Month): 3 (November)
|Contact details of provider:|| Web page: http://link.springer.de/link/service/journals/00199/index.htm|
|Order Information:||Web: http://link.springer.de/orders.htm|
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.:
- 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.
- 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.
- 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.
- Paul Heidhues & Botond Köszegi, 2004.
"The Impact of Consumer Loss Aversion on Pricing,"
CIG Working Papers
SP II 2004-17, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- 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.
- 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.
- 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).
- Pascal Courty & Mario Pagliero, 2006.
"Price Variation Antagonism and Firm Pricing Policies,"
Economics Working Papers
ECO2006/27, European University Institute.
- 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, 2008. "Price Variation Antagonism and Firm Pricing Policies," Economics Working Papers ECO2008/02, European University Institute.
- Courty, Pascal & Pagliero, Mario, 2007. "Price Variation Antagonism and Firm Pricing Policies," CEPR Discussion Papers 6663, C.E.P.R. Discussion Papers.
- Martin J. Osborne & Ariel Rubinstein, 1997.
"Games with Procedurally Rational Players,"
Department of Economics Working Papers
1997-02, McMaster University.
- 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.
- 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.
- Ran Spiegler, 2006.
"The Market for Quacks,"
Review of Economic Studies,
Oxford University Press, vol. 73(4), pages 1113-1131.
- Spiegler, Ran, 2011.
"Bounded Rationality and Industrial Organization,"
Oxford University Press, number 9780195398717, March.
- 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.
- 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.
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: (Guenther Eichhorn)or (Christopher F Baum)
If references are entirely missing, you can add them using this form.