I am very grateful to Mark Armstrong, Steffen Huck, the coeditor, and two anonymous referees for their valuable suggestions and detailed comments, which have greatly improved this paper. I also thank V. Bhaskar, Daniele Condorelli, Armin Falk, David Laibson, Matthew Rabin, Imran Rasul, Jean-Charles Rochet, Ran Spiegler, Michael Waterson, Chris Wilson, and Xiaojian Zhao for their comments. The paper has also benefited from conference presentations at Econometric Society European Meeting (Milan, August 2008), EARIE (Toulouse, September 2008), Econometric Society North American Summer Meeting (Boston, June 2009). Financial support from the British Academy and the Economic and Social Research Council (UK) is gratefully acknowledged.
Reference Dependence and Market Competition
Article first published online: 24 OCT 2011
© 2011 Wiley Periodicals, Inc.
Journal of Economics & Management Strategy
Volume 20, Issue 4, pages 1073–1097, Winter 2011
How to Cite
Zhou, J. (2011), Reference Dependence and Market Competition. Journal of Economics & Management Strategy, 20: 1073–1097. doi: 10.1111/j.1530-9134.2011.00309.x
- Issue published online: 24 OCT 2011
- Article first published online: 24 OCT 2011
This paper examines the implications of consumer reference dependence for market competition. If consumers take some product (e.g., the first product they consider) as the reference point when evaluating others and they exhibit loss aversion, then the more “prominent” firm whose product is taken as the reference point by more consumers will randomize between a high and a low price. We also find that consumer loss aversion in the price dimension intensifies competition while that in the product dimension softens competition. With consumer reference dependence, asymmetric prominence can arise as an equilibrium outcome when firms advertise before engaging in price competition.