Journal ArticleDOI
Competition and Price Variation when Consumers are Loss Averse
Paul Heidhues,Botond Kőszegi +1 more
TLDR
In this paper, the authors modify the Salop model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase.Abstract:
We modify the Salop (1979) model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase. Consumers' sensitivity to losses in money increases the price responsiveness of demand-and hence the intensity of competition-at higher relative to lower market prices, reducing or eliminating price variation both within and between products. When firms face common stochastic costs, in any symmetric equilibrium the markup is strictly decreasing in cost. Even when firms face different cost distributions, we identify conditions under which a focal-price equilibrium (where firms always charge the same "focal" price) exists, and conditions under which any equilibrium is focal.read more
Citations
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Journal ArticleDOI
A Model of Reference-Dependent Preferences
Botond Koszegi,Matthew Rabin +1 more
TL;DR: This article developed a model of reference-dependent preferences and loss aversion where the gain-loss utility is derived from standard consumption utility and the reference point is determined endogenously by the economic environment.
Journal ArticleDOI
Psychology and Economics: Evidence from the Field
TL;DR: The authors survey the empirical evidence from the field on three classes of deviations from the standard model: nonstandard prefer- ences, nonstandard beliefs, and nonstandard decision making, and present evidence on overcon- fidence, on the law of small numbers and on projection bias.
The Endowment Effect, Loss Aversion, and Status Quo Bias
TL;DR: Most behavior can be explained by assuming that agents have stable, well-defined preferences and make rational choices consistent with those preferences in markets that (eventually) clear as discussed by the authors, but this assumption requires implausible assumptions.
Journal ArticleDOI
Reference-Dependent Risk Attitudes
Botond Kőszegi,Matthew Rabin +1 more
TL;DR: The authors use reference-dependent utility models to study preferences over monetary risk, and show that a prior expectation to take on risk decreases aversion to both the anticipated and additional risk. But their model does not consider the impact of the environment on risk aversion.
Posted Content
Reference Points and Effort Provision
TL;DR: The authors found that effort provision is significantly different between treatments in the way predicted by models of expectation-based reference-dependent preferences: if expectations are high, subjects work longer and earn more money than if expectations were low.
References
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Book ChapterDOI
Prospect theory: an analysis of decision under risk
Daniel Kahneman,Amos Tversky +1 more
TL;DR: In this paper, the authors present a critique of expected utility theory as a descriptive model of decision making under risk, and develop an alternative model, called prospect theory, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.
Journal ArticleDOI
Advances in prospect theory: cumulative representation of uncertainty
Amos Tversky,Daniel Kahneman +1 more
TL;DR: Cumulative prospect theory as discussed by the authors applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses, and two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting function.
Journal ArticleDOI
Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias
TL;DR: A wine-loving economist we know purchased some nice Bordeaux wines years ago at low prices as discussed by the authors, but would neither be willing to sell the wine at the auction price nor buy an additional bottle at that price.
Book ChapterDOI
Experimental Tests of the Endowment Effect and the Coase Theorem
TL;DR: In this paper, the Coase theorem predicts that about half the mugs will trade, but observed volume is always significantly less than the predicted volume, suggesting that transactions costs cannot explain the undertrading for consumption goods.
Journal ArticleDOI
Monopolistic competition with outside goods
TL;DR: In this article, a model of spatial competition in which a second commodity is explicitly treated is presented, and it is shown that a zero-profit equilibrium with symmetrically located firms may exhibit rather strange properties.