Does Loss Aversion Preclude Price Variation?

Forthcoming in Manufacturing & Service Operations Management

35 Pages Posted: 5 Sep 2017 Last revised: 11 Jul 2018

See all articles by Ningyuan Chen

Ningyuan Chen

University of Toronto at Mississauga - Department of Management; University of Toronto - Rotman School of Management

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 31, 2017

Abstract

In modern retailing, frequent discounts are seemingly at odds with the idea that price variation antagonizes loss-averse consumers and hence diminishes their demand for products and services. We model a monopolist selling a product over time to loss-averse consumers who differ in their sensitivity to losses. Although the market is thus segmented, the firm cannot price-discriminate among consumers based on that sensitivity. We show that charging a long-run constant price may be suboptimal and then derive conditions under which the optimal policy is cyclic (e.g., a periodic markdown policy). These findings establish that loss aversion does not preclude price variation and thereby underscore the importance of incorporating consumer heterogeneity into pricing policies.

Keywords: behavioral pricing, loss aversion, cyclic pricing, markdown management, retailing

Suggested Citation

Chen, Ningyuan and Nasiry, Javad, Does Loss Aversion Preclude Price Variation? (August 31, 2017). Forthcoming in Manufacturing & Service Operations Management. Available at SSRN: https://ssrn.com/abstract=3029998 or http://dx.doi.org/10.2139/ssrn.3029998

Ningyuan Chen (Contact Author)

University of Toronto at Mississauga - Department of Management ( email )


Canada

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada

Javad Nasiry

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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