Quality Disclosure Under Consumer Loss Aversion

Abstract

Consumers experience a sense of loss when a product’s quality does not match their expectations. To alleviate consumer loss aversion (CLA), firms can disclose information to reduce consumers’ uncertainty about product quality and the resulting psychological loss. In this paper, we investigate the implications of CLA on firm profit, consumer surplus, and social welfare when firms endogenously make quality disclosure decisions. We find that CLA leads symmetric firms to disclose quality more often. Given that CLA weakly reduces consumers’ utility from buying a product and quality disclosure is costly, intuition suggests that CLA is detrimental to firms. We find that this intuition is true only in a monopoly. Surprisingly, CLA makes both firms in a competition better off. Moreover, CLA increases firms’ profit when they invest in quality disclosure instead of money-back guarantees to respond to CLA. We also find that CLA decreases consumer surplus and social welfare. Therefore, educating consumers to improve decision-making skills by deliberating on future outcomes and emotions can benefit firms at the cost of consumers and society. When firms disclose quality sequentially, CLA can discourage the follower from disclosing quality. A strong level of CLA increases the leader’s profit over the follower’s, thereby encouraging firms to be the first mover in quality disclosure. This paper was accepted by Juanjuan Zhang, marketing.

Quality disclosure in sharing economy platform with network externality under consumer risk aversion

“…The result of Zhang and Li (2020) is a special case of our settings, i.e., t = 0, which means that the actual competition is the strongest and consumer risk aversion results in more disclosure.…”

“…A common belief on the extant literature about quality disclosure is that, if the quality disclosure is costly, only when the quality is above a certain value, the firm would disclose quality to differentiate itself from the pool of low-quality firms; otherwise, the firm would conceal quality information, as the gain through improving consumer expectation was not enough to counteract the disclosure cost (Jansen, 2017; Levin et al , 2009; Zhang and Li, 2020). This belief is originated from costly quality disclosure (Jovanovic, 1982).…”

“…Lan et al (2018) focus on the impacts of information value of quality disclosure and show that information value can counteract the disclosure cost partly. Zhang and Li (2020) take consumers' psychological disutility of product uncertainty into consideration and indicate that both loss aversion and risk aversion induce more revealed information.…”

“…For risk-averse consumers, an uncertain option causes an extra psychological utility loss as compared to a certain option with the same expected payoff. Herein, we assume that consumer risk aversion leads to a fixed psychological loss of utility r ∈[0,1], as the setting in the literature (Zhang and Li, 2020). This assumption is relaxed to quality-dependent risk aversion in the extension part.…”

Segmentation based on environmentally responsible behavior: Evidence from SCUBA divers in Taiwan, the Philippines, and Indonesia

“…Each market segment has customers with similar profiles and homogeneous demands (Kaul, 2019). Market segmentation mainly involves analyzing consumer needs through market research and adjusting products based on consumer preferences and needs to meet consumer expectations and increase profits (Zhang & Li, 2021). In the behavioral research context, the market segmentation approach has been widely applied to assess tourists' behavioral intentions (Saleem et al, 2018), attraction to a given destination (Dolnicar et al, 2017), and satisfaction and loyalty (Sánchez‐Pérez et al, 2021).…”