Abstract
We address the effect of the effect of benchmark effect of industry prominent firm for the influence of the duopoly competition. Consumers always consider prominent firms as the industry benchmark, when they evaluate other firms’ product, treating prominent firm as a reference point, thus show the loss aversion behavior. We find that benchmarking effect of the prominent firm makes consumer surplus increase, while decreases both firms’ profits.
Highlights
They tend to focus on the prominent brand, and treat the prominent firm as reference point
We study the benchmark effect on competition through the influence of consumer loss aversion behavior [2], that is to say, consumers tend to form their reference point based on the product “characteristics” of prominent firm
Psychology and behavioral science has accumulated a large number of studies that have shown that rely on consumer preferences are often given reference points, and show the loss aversion behavior, that is to say, the degree of pain from a unit of “lost” deep than joy from a unit of “get”
Summary
They tend to focus on the prominent brand, and treat the prominent firm as reference point Facing those little-known brands, consumers compare them with prominent firm, that is to say, these well-known brand have a benchmark effect. We study the benchmark effect on competition through the influence of consumer loss aversion behavior [2], that is to say, consumers tend to form their reference point based on the product “characteristics” of prominent firm. We build on the work of Zhou, J. and Karle and Peitz [5], based on empirical evidence of loss aversion on service quality and price [6] and develop a parsimonious model that allows firms to make price and quality decisions in the context of a consumer behavior model when market exits a prominent firm.
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