Consumer loss aversion and scale-dependent psychological switching costs

Heiko Karle, Heiner Schumacher and Rune Vølund

Games and Economic Behavior, 2023, vol. 138, issue C, 214-237

Abstract: We consider a model of product differentiation where consumers are uncertain about the qualities and prices of firms' products. They can inspect all products at zero cost. A share of consumers is expectation-based loss averse. For these consumers, buying products of varying quality and price creates disutility from gain-loss sensations. Even at modest degrees of loss aversion they may refrain from inspecting all products and choose an individual default that is strictly dominated in terms of surplus. Firms' strategic behavior exacerbates the scope for this effect. The model generates “scale-dependent psychological switching costs” that increase in the value of the transaction. They imply that making switching easier or costless for consumers would not motivate more switching.

Keywords: Switching costs; Competition; Loss aversion (search for similar items in EconPapers)
JEL-codes: D21 D83 L41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Consumer Loss Aversion and Scale-Dependent Psychological Switching Costs (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:138:y:2023:i:c:p:214-237

DOI: 10.1016/j.geb.2023.01.001

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