What Brings a Consumer Back for More? Evidence from Quantifiable Gain and Loss Experiences in Penny Auctions

38 Pages Posted: 19 Jul 2017 Last revised: 7 Jul 2021

See all articles by Jaimie W. Lien

Jaimie W. Lien

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics

Minbo Xu

Beijing Normal University (BNU) - School of Economics and Business Administration

Jie Zheng

Tsinghua University - School of Economics & Management

Date Written: July 14, 2017

Abstract

Can loss aversion explain consumer retention behavior for new products and experiences? We utilize detailed data from penny auctions, which first appeared as an internet phenomenon in the late 2000’s, to uncover how consumers’ prior experiences predict their willingness to try a relatively new experience again. The penny auction setting allows us to quantify consumers’ positive and negative experiences, avoiding the measurement challenges typical in other consumer experience settings. Using several empirical approaches, we find the following patterns with respect to nominal gains and losses, which bear intuitive resemblance to reference-dependent behavior: First, consumers’ tendency to return is at least weakly increasing in the outcome from their prior experience; Second, consumers’ return rate on marginal loss experiences drops more steeply than it increases for marginal gain experiences; Third, consumers have an aversion to loss at any level, making them discontinuously less likely to return after any loss compared to after a gain. Developing a theoretical model of consumers’ decisions to return to a service after prior experiences, we derive a reasonable set of sufficient conditions on utility functions and reference point formation which can account for these seemingly intuitive empirical findings. Finally, we examine the bracketing tendencies of consumers in calculating their gains and losses after repeated experiences. Consumers tend to bracket narrowly, with the above patterns strengthening, the more recently the experience occurred. The bracketing result is consistent with the intuition that a recent negative experience tends to drive consumers away permanently in spite of previous positive experiences.

Keywords: Consumer Experience, Reference-Dependence, Purchase Mechanisms, Penny Auctions

JEL Classification: D03, D11, D12

Suggested Citation

Lien, Jaimie W. and Xu, Minbo and Zheng, Jie, What Brings a Consumer Back for More? Evidence from Quantifiable Gain and Loss Experiences in Penny Auctions (July 14, 2017). Available at SSRN: https://ssrn.com/abstract=3002907 or http://dx.doi.org/10.2139/ssrn.3002907

Jaimie W. Lien (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics ( email )

Shatin, N.T.
Hong Kong

Minbo Xu

Beijing Normal University (BNU) - School of Economics and Business Administration ( email )

No.19 Xinwai Str
Haidian District
Beijing, 100875
China

Jie Zheng

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

HOME PAGE: http://jzheng.weebly.com/

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