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Loss aversion and the uniform pricing puzzle for media and entertainment products

Pascal Courty () and Javad Nasiry ()
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Javad Nasiry: Hong Kong University of Science and Technology

Economic Theory, 2018, vol. 66, issue 1, No 4, 105-140

Abstract: Abstract The uniform pricing puzzle for vertically differentiated media and entertainment products (movies, books, music, mobile apps, etc.) is that a firm with market power sells high- and low-quality products at the same price even though quality is perfectly observable and price adjustments are not costly. We resolve this puzzle by assuming that consumers have an uncertain taste for quality and accounting for consumer loss aversion in monetary and consumption utilities. The novelty of our approach is that the so-called reference transaction is endogenously set as part of a “personal equilibrium” and is based only on past purchases of same-quality products.

Keywords: Uniform pricing puzzle; Vertically differentiated products; Expectations-based loss aversion; Personal equilibrium (search for similar items in EconPapers)
JEL-codes: D03 L82 D21 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s00199-017-1055-y

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