Consumer Loss Aversion, Product Experimentation and Implicit Collusion

Salvatore Piccolo () and Aldo Pignataro ()
Additional contact information
Aldo Pignataro: Università Cattolica del Sacro Cuore (Milano)

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: Two firms supplying experience goods compete to attract loss averse consumers that are uncertain about how well these goods fit their needs. To resolve valuation uncertainty, firms can allow perspective customers to test (experiment) their products before purchase. We investigate firms' dynamic incentives to allow experimentation and analyze the resulting effects on the profitability and the stability of horizontal price fixing. The analysis shows that, depending on the regulatory regime in place | i.e., whether experimentation is forbidden, mandated or simply allowed but not imposed (laissez-faire) | the degree of consumer loss aversion has ambiguous effects both on the profits that firms can achieve through implicit collusion and on the extent to which these agreements can be sustained. Moreover, we also show that while in static environments consumer welfare is always maximized by a policy that forbids experimentation, the opposite might happen in a dynamic environment.

Keywords: Collusion; Loss Aversion; Product Experimentation; Vertical Differentiation (search for similar items in EconPapers)
JEL-codes: L12 L15 L44 M30 (search for similar items in EconPapers)
Date: 2016-11-07
New Economics Papers: this item is included in nep-com, nep-ind, nep-mkt and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.csef.it/WP/wp457.pdf (application/pdf)

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:sef:csefwp:457

Access Statistics for this paper

More papers in CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy Contact information at EDIRC.
Bibliographic data for series maintained by Dr. Maria Carannante ().