TY - JOUR
T1 - Monopoly pricing when consumers are antagonized by unexpected price increases
T2 - A "cover version" of the Heidhues-Koszegi-Rabin model
AU - Spiegler, Ran
N1 - Funding Information:
Financial support from ERC grant no. 230251 and the ESRC (UK) is gratefully acknowledged. I thank Ayala Arad, Martin Cripps, Eddie Dekel, Kfir Eliaz, Yves Guéron, Paul Heidhues, Botond Kőszegi, Ariel Rubinstein, the editor of this journal and two anonymous referees, for helpful comments.
PY - 2012/11
Y1 - 2012/11
N2 - This paper reformulates and simplifies a recent model by Heidhues and Ko{double acute}szegi (The impact of consumer loss aversion on pricing, Mimeo, 2005), which in turn is based on a behavioral model due to Ko{double acute}szegi and Rabin (Q J Econ 121:1133-1166, 2006). The model analyzes optimal pricing when consumers are loss averse in the sense that an unexpected price hike lowers their willingness to pay. The main message of the Heidhues-Ko{double acute}szegi model, namely that this form of consumer loss aversion leads to rigid price responses to cost fluctuations, carries over. I demonstrate the usefulness of this "cover version" of the Heidhues-Ko{double acute}szegi-Rabin model by obtaining new results: (1) loss aversion lowers expected prices; (2) the firm's incentive to adopt a rigid pricing strategy is stronger when fluctuations are in demand rather than in costs.
AB - This paper reformulates and simplifies a recent model by Heidhues and Ko{double acute}szegi (The impact of consumer loss aversion on pricing, Mimeo, 2005), which in turn is based on a behavioral model due to Ko{double acute}szegi and Rabin (Q J Econ 121:1133-1166, 2006). The model analyzes optimal pricing when consumers are loss averse in the sense that an unexpected price hike lowers their willingness to pay. The main message of the Heidhues-Ko{double acute}szegi model, namely that this form of consumer loss aversion leads to rigid price responses to cost fluctuations, carries over. I demonstrate the usefulness of this "cover version" of the Heidhues-Ko{double acute}szegi-Rabin model by obtaining new results: (1) loss aversion lowers expected prices; (2) the firm's incentive to adopt a rigid pricing strategy is stronger when fluctuations are in demand rather than in costs.
KW - Cover version
KW - Loss aversion
KW - Monopoly pricing
UR - http://www.scopus.com/inward/record.url?scp=84867875478&partnerID=8YFLogxK
U2 - 10.1007/s00199-011-0619-5
DO - 10.1007/s00199-011-0619-5
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AN - SCOPUS:84867875478
SN - 0938-2259
VL - 51
SP - 695
EP - 711
JO - Economic Theory
JF - Economic Theory
IS - 3
ER -