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Consumer Loss Aversion, Product Experimentation and Implicit Collusion

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Abstract

Two firms supplying experience goods compete to attract loss averse consumers that are uncertain about how well these goods fit their needs. To resolve valuation uncertainty, firms can allow perspective customers to test (experiment) their products before purchase. We investigate firms' dynamic incentives to allow experimentation and analyze the resulting effects on the profitability and the stability of horizontal price fixing. The analysis shows that, depending on the regulatory regime in place | i.e., whether experimentation is forbidden, mandated or simply allowed but not imposed (laissez-faire) | the degree of consumer loss aversion has ambiguous effects both on the profits that firms can achieve through implicit collusion and on the extent to which these agreements can be sustained. Moreover, we also show that while in static environments consumer welfare is always maximized by a policy that forbids experimentation, the opposite might happen in a dynamic environment.

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  • Salvatore Piccolo & Aldo Pignataro, 2016. "Consumer Loss Aversion, Product Experimentation and Implicit Collusion," CSEF Working Papers 457, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:457
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    More about this item

    Keywords

    Collusion; Loss Aversion; Product Experimentation; Vertical Differentiation;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L44 - Industrial Organization - - Antitrust Issues and Policies - - - Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations
    • M30 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - General

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