Competing to Sell the Reference Product

Francisco Martínez-Sánchez

Review of Industrial Organization, 2024, vol. 64, issue 4, No 2, 515-531

Abstract: Abstract In a sequential model of vertical product differentiation in which consumers are loss-averse, I analyse how firms compete to sell the reference product when they set prices. I find that there are two subgame perfect equilibria: one where the reference point for all consumers is the higher-quality product; and the other where the reference point is the lower-quality product. However, applying the risk-dominance criterion, I obtain that the sole risk-dominant equilibrium is for the higher-quality firm to sell the reference product. Since the hedonic price of the higher-quality product is the highest, consumers do not suffer any psychological disutility in the risk-dominant equilibrium.

Keywords: Loss aversion; Reference product; Price leader; Vertical product differentiation (search for similar items in EconPapers)
JEL-codes: D43 D90 L13 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11151-024-09950-4 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:revind:v:64:y:2024:i:4:d:10.1007_s11151-024-09950-4

Ordering information: This journal article can be ordered from
http://www.springer. ... on/journal/11151/PS2

DOI: 10.1007/s11151-024-09950-4

Access Statistics for this article

Review of Industrial Organization is currently edited by L.J. White

More articles in Review of Industrial Organization from Springer, The Industrial Organization Society Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().