Are Markets with Loss-Averse Consumers More Sensitive to Losses?

20 Pages Posted: 24 Aug 2016

See all articles by Zhenyu Hu

Zhenyu Hu

National University of Singapore (NUS) - Department of Decision Sciences

Javad Nasiry

Hong Kong University of Science & Technology (HKUST); Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics and Operations Management

Date Written: August 23, 2016

Abstract

Behavioral pricing and revenue management aims to incorporate realistic consumer behavior into firms' pricing and inventory models. The key input to these models is market demand, which is often assumed to inherit the characteristics of consumer behavior --- as when, for example, one assumes that a market consisting of loss-averse consumers is more responsive to losses than to gains. Yet market demand and consumer behavior need not be related and so, we argue, that approach to modeling market demand is misguided. This paper proposes an approach that accounts for the heterogeneity in consumer valuation: we aggregate the demand of individual loss-averse consumers to obtain market demand and show that market demand may be more responsive to gains, to losses or be equally responsive. Our results have profound implications not only for how best to characterize the market demand of behaviorally biased consumers but also for determining the firm's optimal pricing policy.

Keywords: behavioral biases, loss aversion, gain seeking, aggregate demand

Suggested Citation

Hu, Zhenyu and Nasiry, Javad, Are Markets with Loss-Averse Consumers More Sensitive to Losses? (August 23, 2016). Available at SSRN: https://ssrn.com/abstract=2828238 or http://dx.doi.org/10.2139/ssrn.2828238

Zhenyu Hu

National University of Singapore (NUS) - Department of Decision Sciences ( email )

NUS Business School
BIZ 1 Building, #02-01, 1 Business Link
117592
Singapore

Javad Nasiry (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics and Operations Management ( email )

Clear Water Bay
Kowloon
Hong Kong

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