Competition under consumer loss aversion

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.

A Behavioral Analysis of Stochastic Reference Dependence

“…It allows researchers to make use of a larger toolkit of methods and to better understand how to distinguish models of reference dependence from one another. In particular, the relationships developed in Section 3 23 Neilson (2001) makes a related calibrational critique of RDU.…”

“…By Proposition 4, a decision-maker whose preferences have a monotone CPE representation satisfying condition (ii) also suffers from this calibration critique. 23 For example, assume u exhibits decreasing absolute risk aversion. Then, as Safra and Segal (2005) demonstrate, if a decision-maker whose preferences have a monotone CPE representation rejects a lottery that gives −100 with probability 0.5 and 110 with probability 0.5 when added to all gambles defined over a large enough wealth level with a lower bound of w, she will reject a lottery that gives −20, 000 with probability 0.0054 and 100, 000 − ζ with probability .9946 for a sequence of ζ converging to 0 at wealth level w.…”

Bilateral Trade with Loss-Averse Agents

“…In the case without delay, which proves to be more tractable than the setting with delay as well as the setting in the present paper, he solves for the welfare maximizing mechanism. Less closely related, de Meza and Webb (2007) consider incentive design under loss-aversion, Gill and Stone (2010) model a two-player rank-order tournament when agents are loss-averse, Carbajal and Ely (2016) study optimal price discrimination when a monopolist faces a continuum of consumers with reference-dependent preferences, Rosato (2014) proposes expectationsbased loss-aversion as an explanation for the "afternoon effect" observed in sequential auctions, and Karle and Peitz (2014) investigate firm strategy in imperfect competition.…”

Asymmetric gain–loss reference dependence and attitudes toward uncertainty

“…Indeed, many applications use AGL preferences: Lange and Ratan (2010) explore how reference dependence can increase the optimal bid in sealed bid auctions (to be more in line with empirical evidence); Herweg et al (2010) show that loss aversion can explain prevalence of binary incentive schemes (i.e., bonuses) in moral hazard environments; Abeler et al (2011) show that, in an effort provision experiment, expectations-based reference dependence best explains their data; Karle and Peitz (2014) consider the competition of differentiated firms when buyers exhibit loss aversion. Each of the above-mentioned papers assumed a kinked, piecewise linear gain/loss function and assumed the reference point was the expected consumption utility-exactly the characterization given here.…”