Working Paper: CEPR ID: DP7785
Authors: Heiko Karle; Martin Peitz
Abstract: We develop a theory of imperfect competition with loss-averse consumers. All consumers are fully informed about match value and price at the time they make their purchasing decision. However, a share of consumers are initially uncertain about their tastes and form a reference point consisting of an expected match value and an expected price distribution, while other consumers are perfectly informed all the time. We derive pricing implications in duopoly with asymmetric firms. In particular, we show that a market may exhibit more price variation the larger the share of uninformed, loss-averse consumers. We also derive implications for firm strategy and public policy concerning firms? incentives to inform consumers about their match value prior to forming their reference point.
Keywords: advertising; behavioral; industrial organization; imperfect competition; information disclosure; loss aversion; price variation; product differentiation; reference-dependent utility
JEL Codes: D83; L13; L41; M37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| presence of uninformed consumers (D83) | increased price variation (P22) |
| larger share of uninformed loss-averse consumers (G41) | greater price variation (P22) |
| loss aversion (G41) | lower prices (P22) |
| loss aversion (G41) | adjusted pricing strategies (D49) |
| distribution of uninformed consumers (D39) | adjusted pricing strategies (D49) |
| loss aversion (G41) | pro-competitive effect in price dimension (L11) |
| loss aversion (G41) | anti-competitive effect in match value dimension (L42) |