Working Paper: CEPR ID: DP10523
Authors: Pascal Courty; Javad Nasiry
Abstract: The uniform pricing puzzle for vertically differentiated products states that a monopolist sells high and low quality products at the same price despite the fact that quality is perfectly observable and that there are no significant costs of adjusting prices. The puzzle is relevant for movies, books, music, and mobile apps, among others. We show that the puzzle can be resolved by accounting for consumer loss aversion in monetary and consumption utilities and by assuming that consumers face a random utility shock. The novelty of our approach is that the reference transaction is endogenously set as part of a `personal equilibrium' and includes only past purchases of products of the same quality.
Keywords: Expectations-based Loss Aversion; Personal Equilibrium; Uniform Pricing Puzzle; Vertically Differentiated Products
JEL Codes: D03; D21; L1; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| loss aversion (G41) | price compression (D41) |
| loss aversion (G41) | uniform pricing (D41) |
| reference transaction influences valuation (F31) | pricing strategy (L11) |
| loss aversion affects consumption decisions (D11) | firm's pricing strategy (L11) |
| loss aversion constrains firm's ability to adjust prices (D22) | optimal price (D41) |
| personal equilibrium leads to flat pricing structure (D41) | quality classes (C38) |
| loss aversion impacts pricing strategies (G41) | consumer preferences (D11) |