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Bounded Rationality and Industrial Organization$
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Ran Spiegler

Print publication date: 2011

Print ISBN-13: 9780195398717

Published to Oxford Scholarship Online: September 2011

DOI: 10.1093/acprof:oso/9780195398717.001.0001

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Loss Aversion

Loss Aversion

Chapter:
(p.127) 9 Loss Aversion
Source:
Bounded Rationality and Industrial Organization
Author(s):

Spiegler Ran

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780195398717.003.0009

This chapter analyzes monopoly and duopoly pricing when consumers display loss aversion. It assumes that consumers’ reference point is determined by their expectations. First, the model is applied to capture the idea that consumers are antagonized by unexpected price increases, and the implications of this idea for price rigidity and uniformity. Second, the model is applied to capture an “attachment effect” (a variant on the endowment effect) and the implications of this idea for the use of sales.

Keywords:   loss aversion, monopoly pricing, duopoly pricing, reference point, expectations, unexpected price increases, price rigidity, price uniformity, attachment effect, endowment effect, sales, personal equilibrium, reference-dependent preferences

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