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Heidhues, Paul, and
Botond Kőszegi. 2008. "Competition and Price Variation When Consumers Are Loss Averse."
,
98(4): 1245-68.
Show Article Details
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)
Additional links:
Link to Additional Materials
Authors:
Heidhues, Paul (Rheinische Friedrich-Wilhelms U Bonn)
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
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