Selling in Advance to Loss Averse Consumers

Abstract

This paper examines the influence of information on market performance in an advance purchase setting. Information reduces the risk that an advance purchase results in a mismatch between consumer preferences and product characteristics. However, information may also raise the number of advance purchases by increasing a firm’s incentive to offer advance purchase discounts. Our main result shows that accounting for consumer loss aversion leads to a qualitative change in the assessment of policies aiming to improve consumers’ information at the advance purchase stage. Under monopoly information can be detrimental both for efficiency and consumer surplus whereas under competition information is beneficial because it mitigates inter-temporal business stealing.