Consumer price effects: Loss aversion in value vs. in demand

Markku Kallio, Merja Halme and Jaakko Aspara

Journal of the Operational Research Society, 2020, vol. 71, issue 8, 1306-1314

Abstract: It has been established that consumers are often loss averse in the sense that perceived value decreases to a greater extent as a result of a price increase than what it increases as a result of an equal price decrease. We examine a previously scarcely studied question: how is the change in a product’s perceived value following a price change reflected in the product’s market demand? To complement the notion of loss averse (vs. gain seeking) price behaviour in perceived value, we provide a definition for loss averse (vs. gain seeking) price behaviour in demand. We discover that loss aversion in value does not necessarily lead to loss averse market demand, but can also lead to market demand being gain-seeking. We examine the boundary conditions for loss averse vs. gain seeking demand. Assuming that consumer preferences are given by a random utility model and the choice model is McFadden’s conditional logit, we develop a simple formula to check the character of the price behaviour. This provides novel insights by revealing an unexpected key determinant: the market share of the product under consideration. Finally, we consider the optimal price changes and what kind of consumer behaviour in demand they are related to.

Date: 2020
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/01605682.2019.1609884 (text/html)
Access to full text is restricted to subscribers.

Related works:
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:taf:tjorxx:v:71:y:2020:i:8:p:1306-1314

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/tjor20

DOI: 10.1080/01605682.2019.1609884

Access Statistics for this article

Journal of the Operational Research Society is currently edited by Tom Archibald

More articles in Journal of the Operational Research Society from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().