Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/96537 
Year of Publication: 
2010
Series/Report no.: 
ESMT Working Paper No. 10-008
Publisher: 
European School of Management and Technology (ESMT), Berlin
Abstract: 
We study the properties of a profit-maximizing monopolist's optimal price distribution when selling to a loss-averse consumer, where (following Koszegi and Rabin (2006)) we assume that the consumer's reference point is her recent rational expectations about the purchase. If it is close to costless for the consumer to observe the realized price of the product, then – in a pattern consistent with several recently documented facts regarding supermarket pricing – the monopolist chooses low and variable “sale” prices with some probability and a high and sticky “regular” price with the complementary probability. Realizing that she will buy at the sale prices and hence that she will purchase with positive probability, the consumer chooses to avoid the painful uncertainty in whether she will get the product by buying also at the regular price. If it is more costly for the consumer to observe the realized price, then – in a pattern consistent with the pricing behavior of some other retailers (e.g. movie theaters) – the monopolist chooses a sticky price and holds no sales. In this case, a sale is less tempting and hence less effective in generating an expectation to purchase with positive probability. We also show that ex-ante competition for loyal consumers leads to sticky pricing while ex-post competition leads to marginal-cost pricing, and discuss several other extensions of the model.
Subjects: 
reference-dependent utility
gain-loss utility
loss aversion
sticky prices
sales
supermarket pricing
JEL: 
D11
D43
D81
L13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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