This setting lets you change the way you view articles. You can choose to have articles open in a dialog window, a new tab, or directly in the same window.
Open in Dialog
Open in New Tab
Open in same window
Open in New Tab
Open in same window
American Economic Review: Vol. 98 No. 4 (September 2008)
AER Volume. 98, Issue 4 | 
Previous ArticleNext Article
Sign up for Email Alerts Follow us on Twitter
AER Forthcoming Articles
Full-text Article
Link to Additional Materials (153.73 KB)
Previous ArticleNext Article
Expand
Quick Tools:
Print Article Summary Email Link to this Article Export CitationSign up for Email Alerts Follow us on Twitter
Explore:
AER Forthcoming Articles
Competition and Price Variation When Consumers Are Loss Averse
Article Citation
Heidhues, Paul, and
Botond Kőszegi. 2008. "Competition and Price Variation When Consumers Are Loss Averse."
American Economic Review,
98(4): 1245-68.
DOI: 10.1257/aer.98.4.1245
DOI: 10.1257/aer.98.4.1245
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. (JEL D11 , D43, D81, L13)
Article Full-Text Access
Full-text Article
Additional Materials
Link to Additional Materials (153.73 KB)
Authors
Heidhues, Paul (Rheinische Friedrich-Wilhelms U Bonn)
Kőszegi, Botond (U CA, Berkeley)
Kőszegi, Botond (U CA, Berkeley)
JEL Classifications
D11: Consumer Economics: Theory
D43: Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection
D81: Criteria for Decision-Making under Risk and Uncertainty
L13: Oligopoly and Other Imperfect Markets
D43: Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection
D81: Criteria for Decision-Making under Risk and Uncertainty
L13: Oligopoly and Other Imperfect Markets
