Price Discrimination with Loss Averse Consumers
53 Pages Posted: 31 Mar 2015
Date Written: March 2015
This paper proposes a theory of price discrimination based on consumer loss aversion. 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) expectations about contingent consumption. With binary consumer types, the seller finds it optimal to abandon screening under an intermediate range of loss aversion if the low willingness-to-pay consumer is sufficiently likely. We also identify sufficient conditions under which partial or full pooling dominates screening with a continuum of types. Our predictions are consistent with several observed practices of price discrimination.
Keywords: Reference-dependent preferences, loss aversion, price discrimination, personal equilibrium, preferred personal equilibrium
JEL Classification: D03, D42, D82, D86, L11
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