Risk and Loss Aversion, Price Uncertainty and the Implications for Consumer Search

Adriaan Soetevent and Tadas Bružikas ()

No 16-049/VII, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Do the choices of consumers who search for a product's best price exhibit risk neutral, risk averse or loss averse risk attitudes? We study how in a problem of sequential search with costless recall the relation between a consumer's willingness to pay for continued search and the level of price uncertainty depends on her risk preferences. Independent of the current best price, an increase in price uncertainty encourages continued search when consumers are risk neutral. However, we prove that theory predicts an inversion when consumers are either risk or loss averse. In those cases, an increase in price uncertainty only increases the consumer's willingness to pay (WTP) for continued search if the current best price is sufficiently low. We subsequently use this observation in an empirical test to identify between different risk preferences in a stylized problem of sequential search. In line with the inversion, we find that a reduction in price uncertainty decreases the WTP for continued search when the current best price is low but increases the WTP when it is high. While at odds with the assumption of risk neutrality, this finding is consistent with models of consumer risk and/or loss aversion. Moreover, the model parameters of risk and loss aversion that lead to the best empirical fit have values similar to those estimated for other decision domains.

Keywords: consumer search; risk aversion; loss aversion; price uncertainty (search for similar items in EconPapers)
JEL-codes: D11 D12 D83 M31 (search for similar items in EconPapers)
Date: 2016-07-04
New Economics Papers: this item is included in nep-cbe, nep-com, nep-exp, nep-ger, nep-mic, nep-mkt and nep-upt
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Related works:
Working Paper: Risk and Loss Aversion, Price Uncertainty and the Implications for Consumer Search (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20160049

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