Reference Dependence and Market Competition

25 Pages Posted: 25 Oct 2011

See all articles by Jidong Zhou

Jidong Zhou

University College London - Department of Economics

Date Written: Winter 2011

Abstract

This paper examines the implications of consumer reference dependence for market competition. If consumers take some product (e.g., the first product they consider) as the reference point when evaluating others and they exhibit loss aversion, then the more “prominent” firm whose product is taken as the reference point by more consumers will randomize between a high and a low price. We also find that consumer loss aversion in the price dimension intensifies competition while that in the product dimension softens competition. With consumer reference dependence, asymmetric prominence can arise as an equilibrium outcome when firms advertise before engaging in price competition.

Suggested Citation

Zhou, Jidong, Reference Dependence and Market Competition (Winter 2011). Journal of Economics & Management Strategy, Vol. 20, Issue 4, pp. 1073-1097, 2011. Available at SSRN: https://ssrn.com/abstract=1948956 or http://dx.doi.org/10.1111/j.1530-9134.2011.00309.x

Jidong Zhou (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

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