Screening Loss Averse Consumers

51 Pages Posted: 19 Sep 2010

See all articles by Jong-Hee Hahn

Jong-Hee Hahn

Yonsei University - Department of Economics

Jinwoo Kim

Yonsei University

Sang-Hyun Kim

Michigan State University

Jihong Lee

Seoul National University

Date Written: September 17, 2010

Abstract

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

Suggested Citation

Hahn, Jong-Hee and Kim, Jinwoo and Kim, Sang-Hyun and Lee, Jihong, Screening Loss Averse Consumers (September 17, 2010). Available at SSRN: https://ssrn.com/abstract=1678825 or http://dx.doi.org/10.2139/ssrn.1678825

Jong-Hee Hahn

Yonsei University - Department of Economics ( email )

50 Yonsei-Ro
Seoul, 120-749
Korea

Jinwoo Kim

Yonsei University ( email )

Seoul 120-749
Korea, Republic of (South Korea)

Sang-Hyun Kim

Michigan State University ( email )

East Lansing, MI 48824-1122
United States

Jihong Lee (Contact Author)

Seoul National University ( email )

Department of Economics
Seoul, 151-742
Korea, Republic of (South Korea)

HOME PAGE: http://sites.google.com/site/jihong33/

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