Screening Loss Averse Consumers
51 Pages Posted: 19 Sep 2010
Date Written: September 17, 2010
Sellers often discriminate heterogeneous consumers with just a few products. This paper proposes an explanation for such coarse screening, based on consumer loss aversion. In our model, a seller offers a menu of bundles before a consumer learns his willingness to pay, and the consumer experiences gain-loss utility with reference to his prior (rational) expectation a la Koszegi and Rabin (2006). For the case of binary consumer types, we show that the seller finds it optimal to offer a pooling menu under an intermediate range of loss aversion if the likelihood of low willingness-to-pay consumer is sufficiently large. We also identify sufficient conditions under which partial or full pooling dominates screening for the case of continuous types.
Keywords: Reference-dependent preferences, loss aversion, price discrimination, screening menu, pooling menu
JEL Classification: D03, D82, D86
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