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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 27, No. 2, pp.171-186
ISSN: 1225-0279 (Print)
Print publication date 30 May 2014
Received 16 Mar 2014 Revised 27 Apr 2014 Accepted 28 Apr 2014

Firm Behavior under Consumer Loss Aversion

Sang-Hyun Kim ; Jihong Lee
Lecturer, School of Economics and the ESRC Centre for Competition Policy, University of East Anglia, Norwich, NR4 7TJ, UK sang-hyun.kim@uea.ac.uk
Associate Professor, Department of Economics, Seoul National University, Seoul 151-746, Korea jihong33@gmail.com

JEL Classification: D03, D21, D42, D43, L12, L13, M52

Abstract

This survey aims to provide an overview of recent developments in the industrial organization literature that explores the behavior of profit-maximizing firms facing consumers with reference-dependent preferences and loss aversion. We discuss the implications of loss aversion on the practice of price discrimination, product differentiation, and incentive provision, among others. A common theme is emerging from these studies: consumer loss aversion may serve to limit the benefits from complex firm strategies that depend on the realizations of uncertainty.

Keywords:

Survey, Reference-dependent preferences, Loss aversion, Personal equilibrium, Monopoly pricing, Price discrimination, Product differentiation, Agency problem

Acknowledgments

We would like to thank Jong-Hee Hahn and Jinwoo Kim for their helpful comments. This research was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2011-327-B00094).

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