Competition and Price Variation when Consumers Are Loss Averse

Heidhues, Paul; Kőszegi, Botond

doi:10.1257/aer.98.4.1245

Cited by 281 publications

(199 citation statements)

References 35 publications

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“…The size of the coefficient is thus much larger than the respective value in regression (5-GF), which is consistent with the finding that substitutions are on average defensive if a team is in the gain frame. Understanding the determinants and behavioral effects of reference points is important for many fields in economics, such as worker morale and effort choices (e.g., Bewley (1999)), consumer goods pricing (e.g., Heidhues and Köszegi (2008)), or optimal contracting (e.g., Hart and Moore (2008), Herweg et al (2010)). Our paper provides evidence in support of models assuming that peoples'…”

Section: Gain Framementioning

confidence: 99%

Expectations as Reference Points: Field Evidence from Professional Soccer

Bartling

Brandes

Schunk³

2015

Management Science

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We show that professional soccer players and their coaches exhibit reference-dependent behavior during matches. Controlling for the state of the match and for unobserved heterogeneity, we show on a minute-by-minute basis that players breach the rules of the game, measured by the referee's assignment of cards, significantly more often if their teams are behind the expected match outcome, measured by pre-play betting odds of large professional bookmakers. We further show that coaches implement significantly more offensive substitutions if their teams are behind expectations. Both types of behaviors impair the expected ultimate match outcome of the team, which shows that our findings do not simply reflect fully rational responses to referencedependent incentive schemes of favorite teams to falling behind. We derive these results in a data set that contains more than 8'200 matches from 12 seasons of the German Bundesliga and 12 seasons of the English Premier League.

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Section: Gain Framementioning

confidence: 99%

Expectations as Reference Points: Field Evidence from Professional Soccer

Bartling

Brandes

Schunk³

2015

Management Science

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“…2 In contrast, a growing stream of literature relaxes these assumptions to investigate the impacts of consumers' behavioral issues on their purchase decisions and the seller's optimal pricing strategies. The behavioral issues that have been studied include loss aversion (Popescu and Wu 2007, Heidhues and Kőszegi 2008, Nasiry and Popescu 2011, Baron et al 2014), hyperbolic discounting (Su 2009, Baucells et al 2014, and anticipated regret (Diecidue et al 2012, Nasiry andPopescu 2012). We refer the reader toÖzer and Zheng (2012) for a comprehensive review of the behavioral pricing literature.…”

Section: Literature Reviewmentioning

confidence: 99%

Markdown or Everyday Low Price? The Role of Behavioral Motives

2016

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We study a seller's optimal pricing and inventory strategies when behavioral (non-pecuniary) motives affect consumers' purchase decisions. In particular, the seller chooses between two pricing strategies, markdown or everydaylow-price, and determines the optimal prices and inventory level at the beginning of a two-period selling season. Two salient behavioral motives that impact consumers' purchase decisions and the seller's optimal strategies are anticipated regret and misperception of product availability. Regret arises when a consumer initially chooses to wait but encounters stockout later, or when the consumer buys the product at the high price but realizes that the product is still available at the markdown price. In addition, consumers often perceive the product's future availability to be different than its actual availability. We determine and quantify that both regret and availability misperception have significant operational and profit implications for the seller. For example, ignoring these behavioral factors can result in up to 10% profit losses. We contrast the roles of consumers' strategic (pecuniary) motives with their behavioral (non-pecuniary) motives in affecting purchase, pricing, and inventory decisions. The presence of the behavioral motives reinstates the profitability of markdown over everyday-low-price, in sharp contrast to prior studies of only strategic motives which suggest the contrary. We characterize how and why strategic versus behavioral motives affect decisions in distinctive manners. In doing so, this paper also introduces and determines the behavioral benefits of pricing in leveraging consumers' behavioral regularities. We advocate that tactics which may intensify consumers' misperception of availability, such as intentionally disclosing low inventory levels, can have a far-reaching impact on improving the seller's profit.*

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“…Our model of consumer behavior follows the approaches of Kőszegi and Rabin (2006) and Heidhues and Kőszegi (2008), but it adapts and simplifies these theories to fit the decision of whether to purchase a single product. The consumer's utility function has two components.…”

Section: Modelmentioning

confidence: 99%

“…17 In all of these papers, each firm is left 15 Karle and Peitz (2010) qualify Heidhues and Kőszegi's (2008) prediction of reduced price variability by showing that in some asymmetric duopolistic environments-specifically, when consumers observe prices but not how much they will like each product before their expectations-based reference point is set-consumer loss aversion can actually increase price differences. Deviating from the expectations-based model, Zhou (2011) assumes that consumers take the first or most prominent price they see as the reference point for money outlays.…”

Section: Theories Of Pricingmentioning

confidence: 99%

“…2 For instance, Sibly (2002) shows that consumer loss aversion can generate "price stickiness"-the unresponsiveness of prices to changes in cost or demand circumstances-while Heidhues and Kőszegi (2008) establish that it can also explain why nonidentical competitors often sell differentiated goods at identical prices. Similarly, Herweg and Mierendorff (2013) argue that the prevalence of flat-rate contracts can be due to consumer loss aversion.…”

Section: Introductionmentioning

confidence: 99%

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Regular Prices and Sales

Heidhues

Kőszegi

2010

SSRN Journal

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It is widely known that loss aversion leads individuals to dislike risk and, as has been argued by many researchers, in many instances this creates an incentive for firms to shield consumers and employees against economic risks. Complementing previous research, we show that consumer loss aversion can also have the opposite effect: it can lead a firm to optimally introduce risk into an otherwise deterministic environment. We consider a profit-maximizing monopolist selling to a loss-averse consumer, where (following Kőszegi and Rabin 2006) we assume that the consumer's reference point is her recent rational expectations about the purchase. We establish that for any degree of consumer loss aversion, the monopolist's optimal price distribution consists of low and variable "sale" prices and a high and atomic "regular" price. Realizing that she will buy at the sales prices and hence that she will purchase with positive probability, the consumer chooses to avoid the painful uncertainty in whether she will get the product by buying also at the regular price. This pricing pattern is consistent with several recently documented facts regarding retailer pricing. We show that market power is crucial for this result: when firms compete ex ante for consumers, they choose deterministic prices.

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Competition and Price Variation when Consumers Are Loss Averse

Cited by 281 publications

References 35 publications

Expectations as Reference Points: Field Evidence from Professional Soccer

Expectations as Reference Points: Field Evidence from Professional Soccer

Markdown or Everyday Low Price? The Role of Behavioral Motives

Regular Prices and Sales

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