What Brings a Consumer Back for More? Evidence from Quantifiable Gain and Loss Experiences in Penny Auctions

Abstract

Can loss aversion explain consumer retention behavior for new products and experiences? We utilize detailed data from penny auctions, which first appeared as an internet phenomenon in the late 2000’s, to uncover how consumers’ prior experiences predict their willingness to try a relatively new experience again. The penny auction setting allows us to quantify consumers’ positive and negative experiences, avoiding the measurement challenges typical in other consumer experience settings. Using several empirical approaches, we find the following patterns with respect to nominal gains and losses, which bear intuitive resemblance to reference-dependent behavior: First, consumers’ tendency to return is at least weakly increasing in the outcome from their prior experience; Second, consumers’ return rate on marginal loss experiences drops more steeply than it increases for marginal gain experiences; Third, consumers have an aversion to loss at any level, making them discontinuously less likely to return after any loss compared to after a gain. Developing a theoretical model of consumers’ decisions to return to a service after prior experiences, we derive a reasonable set of sufficient conditions on utility functions and reference point formation which can account for these seemingly intuitive empirical findings. Finally, we examine the bracketing tendencies of consumers in calculating their gains and losses after repeated experiences. Consumers tend to bracket narrowly, with the above patterns strengthening, the more recently the experience occurred. The bracketing result is consistent with the intuition that a recent negative experience tends to drive consumers away permanently in spite of previous positive experiences.