A paradoxical risk aversion effect on the consumers’ 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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"Self-Insurance, Self-Protection and Increased Risk Aversion,"
Cahiers de recherche
8424, Universite de Montreal, Departement de sciences economiques.
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- DIONNE, George & EECKHOUDT, Louis, "undated". "Self-insurance, self-protection and increased risk aversion," CORE Discussion Papers RP 623, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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- Isabel GRILO & Xavier WAUTHY, 2000.
"Price Competition when Product Quality is Uncertain,"
Discussion Papers (REL - Recherches Economiques de Louvain)
2000043, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- GRILO, Isabel & WAUTHY, Xavier, "undated". "Price competition when product quality is uncertain," CORE Discussion Papers RP 1509, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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