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.
| Original language | English |
|---|---|
| Pages (from-to) | 681-728 |
| Number of pages | 48 |
| Journal | Economic Theory |
| Volume | 65 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - 2018 May 1 |
Bibliographical note
Funding Information:This paper was previously circulated under the title “Screening Loss Averse Consumers.” This research was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2014S1A5A2A03065638) and by the Institute of Economic Research of Seoul National University.
Funding Information:
The authors have received helpful comments from Juan Carlos Carbajal, Yeon-Koo Che, Faruk Gul, Paul Heidhues, Navin Kartik, Shaowei Ke, Fuhito Kojima, Tracy Lewis, Stephen Morris, Matthew Rabin, Tim Van Zandt as well as seminar participants at AMES 2013, Beijing GSM, CUHK, Gerzensee 2011, KEA/KAEA 2011, New South Wales, Sogang and Yonsei. This paper was previously circulated under the title ?Screening Loss Averse Consumers.? This research was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2014S1A5A2A03065638) and by the Institute of Economic Research of Seoul National University.
Publisher Copyright:
© 2017, The Author(s).
All Science Journal Classification (ASJC) codes
- Economics and Econometrics