Premium
Competition under consumer loss aversion
Author(s) -
Karle Heiko,
Peitz Martin
Publication year - 2014
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12040
Subject(s) - loss aversion , duopoly , microeconomics , imperfect competition , economics , outcome (game theory) , competition (biology) , value (mathematics) , point (geometry) , imperfect , distribution (mathematics) , cournot competition , ecology , linguistics , philosophy , geometry , mathematics , machine learning , computer science , biology , mathematical analysis
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.