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Pricing and Information Disclosure in Markets with Loss-Averse Consumers

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  • Karle, Heiko
  • Peitz, Martin

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

  • 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.
  • Handle: RePEc:cpr:ceprdp:7785
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    References listed on IDEAS

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    1. Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(3), pages 863-904.
    2. Mark Armstrong & Yongmin Chen, 2009. "Inattentive Consumers and Product Quality," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 411-422, 04-05.
    3. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters,in: Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74 Edward Elgar Publishing.
    4. Kfir Eliaz & Ran Spiegler, 2006. "Contracting with Diversely Naive Agents," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 689-714.
    5. Maarten C. W. Janssen & José Luis Moraga-González, 2004. "Strategic Pricing, Consumer Search and the Number of Firms," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1089-1118.
    6. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-1268, September.
    7. Jidong Zhou, 2011. "Reference Dependence and Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 1073-1097, December.
    8. Michael D. Grubb, 2009. "Selling to Overconfident Consumers," American Economic Review, American Economic Association, vol. 99(5), pages 1770-1807, December.
    9. 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.
    10. Anderson, Simon P & Renault, Regis, 2000. "Consumer Information and Firm Pricing: Negative Externalities from Improved Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 721-742, August.
    11. Heski Bar-Isaac & Guillermo Caruana & Vicente Cunat, 2007. "Information Gathering Externalities in Product Markets," Working Papers 07-18, New York University, Leonard N. Stern School of Business, Department of Economics.
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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. Heidhues, Paul & Koszegi, Botond, 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.

    More about this item

    Keywords

    Advertising; Behavioral Industrial Organization; Imperfect Competition; Information Disclosure; Loss Aversion; Price Variation; Product Differentiation; Reference-Dependent Utility;

    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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