Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs

Antonio Rosato

MPRA Paper from University Library of Munich, Germany

Abstract: Why are some sale items subject to limited availability while other substitute items are available in large quantities and are priced relatively high at the same point in time? Can such a retail strategy lure consumers into purchasing the more expensive item? This paper characterizes the profit-maximizing pricing and product-availability strategies for a retailer selling two substitute goods to loss-averse consumers and shows that limited-availability sales can manipulate consumers into an ex-ante unfavorable purchase. Consumers have unit demand, are interested in buying only one good, and their reference point is given by their recent rational expectations about what consumption value they would receive and what price they would pay. The seller maximizes profits by raising the consumers' reference point through a tempting discount on a good available only in limited supply (the bargain) and cashing in with a high price on the other good (the rip-off), which the consumers buy if the bargain is not available to minimize their disappointment. The seller might prefer to offer a deal on the more valuable product, using it as a bait, because consumers feel a larger loss, in terms of forgone consumption, if this item is not available. I also show that the bargain item can be a loss leader, that the seller's product line is not welfare-maximizing and that she might supply a socially wasteful product. The model suggests that the current FTC Guides Against Bait Advertising, by allowing retailers to employ limited-availability sales, could reduce consumer and social welfare.

Keywords: Retail Pricing; Reference-Dependent Preferences; Loss Aversion; Limited Availability; Bait and Switch; Loss Leaders. (search for similar items in EconPapers)
JEL-codes: D11 D42 L11 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Journal Article: Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:47168

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