Chapter

Loss Aversion

Spiegler Ran

in Bounded Rationality and Industrial Organization

Published in print February 2011 | ISBN: 9780195398717
Published online September 2011 | e-ISBN: 9780199896790 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780195398717.003.0009
Loss Aversion

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This chapter analyzes monopoly and duopoly pricing when consumers display loss aversion. It assumes that consumers’ reference point is determined by their expectations. First, the model is applied to capture the idea that consumers are antagonized by unexpected price increases, and the implications of this idea for price rigidity and uniformity. Second, the model is applied to capture an “attachment effect” (a variant on the endowment effect) and the implications of this idea for the use of sales.

Keywords: loss aversion; monopoly pricing; duopoly pricing; reference point; expectations; unexpected price increases; price rigidity; price uniformity; attachment effect; endowment effect; sales; personal equilibrium; reference-dependent preferences

Chapter.  10486 words. 

Subjects: Economics

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