A paradoxical risk aversion effect on the consumers’ demand for quality

David Bardey

No 2004015, Discussion Papers (REL - Recherches Economiques de Louvain) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: In this article, we consider a demand model for a durable good with unknown quality. The quality of the good is uncertain in the sense that the consumer ignores (ex ante) whether the good will break down or not, higher quality implying a higher probability of survival. Taking into account this uncertainty around the quality, we show that the demand for quality can, paradoxically, decrease when consumers are more risk averse. We prove that this risk aversion effect can disturb the second-order price discrimination policies applied by some firms. We reveal the link between quality demand and self-protection theory.

Keywords: Vertical differentiation; Risk aversion; Self-protection (search for similar items in EconPapers)
JEL-codes: D81 D82 L12 (search for similar items in EconPapers)
Pages: 8
Date: 2004-03-01
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