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Competition under consumer loss aversion

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  • Karle, Heiko
  • Peitz, Martin

Abstract

We address the effect of contextual consumer loss aversion on firm strategy in imperfect competition. Consumers are fully informed about match value and price at the moment of purchase. However, some consumers are initially uninformed about their tastes and form a reference point consisting of an expected match—value and price distribution, while others are perfectly informed all the time. We show that, in duopoly, a larger share of informed consumers leads to a less competitive outcome if the asymmetry between firms is sufficiently large and that narrowing the set of products which consumers consider leads to a more competitive outcome.

Suggested Citation

  • Karle, Heiko & Peitz, Martin, 2012. "Competition under consumer loss aversion," Working Papers 12-08, University of Mannheim, Department of Economics.
  • Handle: RePEc:mnh:wpaper:31642
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    More about this item

    Keywords

    Contextual loss aversion ; reference-dependent utility ; behavioral industrial organization ; imperfect competition ; product differentiation;
    All these keywords.

    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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