Loss Aversion, Price and Quality
The Spence model (1975) is extended so that customersâ€™ utility depends on their disposition to the firm in addition to quantity and quality of the good consumed. Disposition is determined by customersâ€™ perception of firmâ€™s pricing and quality decisions, which perception is â€˜reference dependentâ€™. The profit maximising and efficient price and quality combinations are derived. Adjustment to a change in economic conditions may call for price rigidity, quality rigidity or both depending on the level of the reference price and quality
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