A paradoxical risk aversion effect on the consumersâ€™ demand for quality
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.
|Date of creation:||01 Mar 2004|
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- 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, vol. 44(2), pages 573-597, 05.
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"Self-Insurance, Self-Protection and Increased Risk Aversion,"
Cahiers de recherche
8424, Universite de Montreal, Departement de sciences economiques.
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- Eeckhoudt, L. & Godfroid, Ph. & Gollier, C., 1997. "Willingness to pay, the risk premium and risk aversion," Economics Letters, Elsevier, vol. 55(3), pages 355-360, September.
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