Price Discrimination with Loss Averse Consumers

53 Pages Posted: 31 Mar 2015

See all articles by Jong-Hee Hahn

Jong-Hee Hahn

Yonsei University - Department of Economics

Jinwoo Kim

Yonsei University

Sang-Hyun Kim

University of East Anglia (UEA)

Jihong Lee

Seoul National University

Date Written: March 2015

Abstract

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

Suggested Citation

Hahn, Jong-Hee and Kim, Jinwoo and Kim, Sang-Hyun and Lee, Jihong, Price Discrimination with Loss Averse Consumers (March 2015). Available at SSRN: https://ssrn.com/abstract=2587619 or http://dx.doi.org/10.2139/ssrn.2587619

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

University of East Anglia (UEA) ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

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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