Are Markets with Loss-Averse Consumers More Sensitive to Losses?

Zhenyu Hu () and Javad Nasiry ()
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Zhenyu Hu: NUS Business School, National University of Singapore, Singapore 119245
Javad Nasiry: School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong

Management Science, 2018, vol. 64, issue 3, 1384-1395

Abstract: Behavioral pricing and revenue management aim to incorporate realistic consumer behavior into firms’ pricing and inventory models. The key input to these models is market demand, which is often assumed to inherit the characteristics of consumer behavior—as when, for example, one assumes that a market consisting of loss-averse consumers is more responsive to losses than to gains. Yet market demand and consumer behavior need not be related, and so, we argue, that approach to modeling market demand is misguided. This paper proposes an approach that accounts for the heterogeneity in consumer valuation: we aggregate the demand of individual loss-averse consumers to obtain market demand and show that market demand may be more responsive to gains or losses, or it may be equally responsive. Our results have profound implications not only for how best to characterize the market demand of behaviorally biased consumers but also for determining the firm’s optimal pricing policy.

Keywords: behavioral biases; loss aversion; gain seeking; consumer heterogeneity; aggregate demand (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (4)

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