This article merges and replaces two previous articles: “Consumer Loss Aversion and the Intensity of Competition” and “Pricing and Information Disclosure in Markets with Loss-Averse Consumers.” We are grateful to the editor, Mark Armstrong, three anonymous referees, Heski Bar-Isaac, Paul Heidhues, Justin Johnson, Emir Kamenica, Rani Spiegler, Jidong Zhou, and various seminar audiences for helpful comments and suggestions. We gratefully acknowledge financial support from the National Bank of Belgium (Research Grant, “The Impact of Consumer Loss Aversion on the Price Elasticity of Demand”), the ARC Grant, “Market Evolution, Competition, and Policy: Theory and Evidence” and the German Science Foundation (SFB TR 15).
Competition under consumer loss aversion
Version of Record online: 25 MAR 2014
© 2014, RAND.
The RAND Journal of Economics
Volume 45, Issue 1, pages 1–31, Spring 2014
How to Cite
Karle, H. and Peitz, M. (2014), Competition under consumer loss aversion. The RAND Journal of Economics, 45: 1–31. doi: 10.1111/1756-2171.12040
- Issue online: 25 MAR 2014
- Version of Record online: 25 MAR 2014
- National Bank of Belgium Research Grant
- “The Impact of Consumer Loss Aversion on the Price Elasticity of Demand”
- ARC Grant, “Market Evolution, Competition, and Policy: Theory and Evidence”
- German Science Foundation (SFB TR 15)
We address the effect of expectation-based 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, whereas others are perfectly informed all the time. We show that if firms have symmetric costs, a larger share of informed consumers leads to a more competitive outcome. The reverse holds if cost asymmetry in duopoly is sufficiently large.