Monopoly pricing when consumers are antagonized by unexpected price increases: a “cover version” of the Heidhues–Kőszegi–Rabin model

Ran Spiegler ()

Economic Theory, 2012, vol. 51, issue 3, 695-711

Abstract: This paper reformulates and simplifies a recent model by Heidhues and Kőszegi (The impact of consumer loss aversion on pricing, Mimeo, 2005 ), which in turn is based on a behavioral model due to Kőszegi and Rabin (Q J Econ 121:1133–1166, 2006 ). The model analyzes optimal pricing when consumers are loss averse in the sense that an unexpected price hike lowers their willingness to pay. The main message of the Heidhues–Kőszegi model, namely that this form of consumer loss aversion leads to rigid price responses to cost fluctuations, carries over. I demonstrate the usefulness of this “cover version” of the Heidhues–Kőszegi-Rabin model by obtaining new results: (1) loss aversion lowers expected prices; (2) the firm’s incentive to adopt a rigid pricing strategy is stronger when fluctuations are in demand rather than in costs. Copyright Springer-Verlag 2012

Keywords: Loss aversion; Monopoly pricing; Cover version; D03; D42 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

Downloads: (external link)
http://hdl.handle.net/10.1007/s00199-011-0619-5 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Monopoly Pricing when Consumers are Antagonized by Unexpected Price Increases: A "Cover Version" of the Heidhues-Koszegi-Rabin Model (2010)
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:spr:joecth:v:51:y:2012:i:3:p:695-711

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-011-0619-5

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().