Loss Aversion and the Uniform Pricing Puzzle for Vertically Differentiated Products

Pascal Courty and Javad Nasiry

No 10523, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The uniform pricing puzzle for vertically differentiated products states that a monopolist sells high and low quality products at the same price despite the fact that quality is perfectly observable and that there are no significant costs of adjusting prices. The puzzle is relevant for movies, books, music, and mobile apps, among others. We show that the puzzle can be resolved by accounting for consumer loss aversion in monetary and consumption utilities and by assuming that consumers face a random utility shock. The novelty of our approach is that the reference transaction is endogenously set as part of a `personal equilibrium' and includes only past purchases of products of the same quality.

Keywords: Personal equilibrium; Uniform pricing puzzle; Vertically differentiated products; Expectations-based loss aversion (search for similar items in EconPapers)
JEL-codes: D03 D21 L1 L2 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-com, nep-mkt and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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