Consumer Loss Aversion Research Articles

Loss Aversion Distribution: The Science Behind Loss Aversion Exhibited by Sellers of Perishable Good

This research introduces the concept of the loss aversion distribution, a pioneering framework designed for the analysis of consumer behavior. Departing from the conventions of traditional exponential models, this innovative approach incorporates a non-memoryless characteristic, which modulates the consumer's response to loss aversion throughout the product's life cycle. This modulation is achieved by a variable exponent influenced by the parameter $b$, representing the psychological impact of loss aversion, and the constant $k$, which reflects the market value of the good at the time of manufacture. Together, these parameters adeptly encapsulate the dynamic nature of consumer loss aversion from the moment of manufacture to the point of expiry. The model elucidates an initial muted response from consumers at the onset of ownership, which then intensifies during the mid-life cycle of the product, before ultimately diminishing as the product approaches its expiry. Through a meticulous derivative analysis of the probability density function, the study delineates the distribution's key properties, including its monotonicity, boundedness within the interval [0, 1], and its adherence to non-negativity. This framework not only enhances our comprehension of consumer behavior in relation to perishable goods but also paves the way for further investigations into psychometrics and the intricacies of loss aversion modeling.

Literature Review: The Impact of Consumer Loss Aversion on Pricing Strategies in the Internet Era

Loss aversion is gaining attention in economic analysis and has implications for the pricing strategies of merchants in this Internet age. Moreover, in the past, there was a particular gap in the research on the relationship between loss aversion and pricing strategies. For this reason, this paper adopts the form of a literature review to review the relevant literature in the past. This review covers studies and related articles on loss aversion, loss aversion in the Internet era, pricing policies and loss aversion associated with pricing strategies. This study aims to provide an accurate definition of both by reviewing the literature on loss aversion and pricing policies. By summarizing and analyzing the past literature, the relationship between the two is re-examined to find the intrinsic link that exists between the two. The results of this study identify research gaps in the research area and point out future research directions.

Quality disclosure strategies for small business enterprises under consumer loss aversion

In this paper, we focus on small business enterprises (SBEs) that usually have low market power but can rely on retailers to transact sales and gain the ability to disclose quality information. Moreover, consumer loss aversion (CLA) is pronounced when buying from SBEs that have yet to develop a strong reputation and uncertain quality. We focus on two competing SBEs with heterogeneous quality levels and discuss their quality disclosure strategies— whether selling through a retailer— in the context of CLA. We study the interaction between consumers' prior belief in product quality and CLA and how these factors affect equilibrium outcomes. We show that a situation in which low-quality and high-quality SBEs both choose to disclose will not occur under a neutral consumer attitude, i.e., it happens only when the aversion level is significant. When the aversion level is low, either the low-quality SBE or the high-quality SBE will decide to disclose, and the disclosing party depends on the prior belief. In addition, CLA significantly impacts the monotonicity of both SBEs' and retailers' prices and profits relating to the consumers' prior beliefs.

Dual-Channel Pricing Decisions for Product Recycling in Green Supply Chain Operations: Considering the Impact of Consumer Loss Aversion.

With the vigorous rise of online third-party recycling platforms, dual-channel recycling has become the primary recycling mode in the reverse supply chain (RSC). However, as the main body of recycling, consumers have a significant impact on the recycling process, and their behavioral preferences are rarely considered in the pricing decision of the reverse recycling supply chain. Based on the dual-channel RSC, this paper considers the competition among channels. It introduces the loss aversion behavior preference of consumers to establish a dual-channel RSC composed of remanufacturers and online and offline recyclers. This study aims to analyze the impact of consumers' loss aversion behavior on the recycling pricing and profit of each node in the green RSC and discuss the decision of recyclers under consumers' loss aversion behavior. The results show that the deeper consumers' aversion to the loss of recycling price, the lower the recycling price of dual-channel recyclers will be, which will be more conducive to the increase in the profit of online recyclers. However, the profit of remanufacturers will be reduced, and the total amount of recycling will decline. This paper considers the impact of consumer loss aversion behavior on dual-channel reverse supply chain pricing decisions based on prospect theory. It provides references for chain members to set recycling prices to increase people's enthusiasm for recycling and the amount of recycled scrap, contributes to the cause of resource conservation and environmental protection, and improves the economic efficiency of recycling enterprises.

Consumer loss aversion and scale-dependent psychological switching costs

We consider a model of product differentiation where consumers are uncertain about the qualities and prices of firms' products. They can inspect all products at zero cost. A share of consumers is expectation-based loss averse. For these consumers, buying products of varying quality and price creates disutility from gain-loss sensations. Even at modest degrees of loss aversion they may refrain from inspecting all products and choose an individual default that is strictly dominated in terms of surplus. Firms' strategic behavior exacerbates the scope for this effect. The model generates “scale-dependent psychological switching costs” that increase in the value of the transaction. They imply that making switching easier or costless for consumers would not motivate more switching.

Quality Disclosure Strategies for Small Business Enterprises Under Consumer Loss Aversion

Quality Disclosure Strategies for Small Business Enterprises Under Consumer Loss Aversion

Consumer Loss Aversion and Dynamic Optimal Pricing

Consumer Loss Aversion and Dynamic Optimal Pricing

The impacts of digital content piracy and copyright protection policies when consumers are loss averse

<p style='text-indent:20px;'>Recent technological advances in digitization and online communications have enabled unauthorized reproduction and illegal file-sharing. However, controversies still exist over the impacts of digital content piracy and copyright protection policies. Using a game-theoretic framework, we examine the impacts of digital content piracy and copyright protection policies on product quality, firm profitability, consumer surplus, and social welfare when consumers exhibit loss aversion in the quality dimension. Specifically, consumers are initially uncertain about the product quality and will form an expectation, but once they buy the licensed product or use piracy, they know the actual product quality and compare it with their expectation. When consumers are loss averse, consumer propensity to an option is more negatively affected by product quality above the expectation than positively affected by product quality below the expectation. Our analysis shows that although piracy exerts a negative cannibalization effect in the absence of loss aversion, it can exert an additional positive information effect when the degree of loss aversion on the licensed product is higher than the degree of loss aversion on piracy. We find that when the information effect dominates the cannibalization effect, piracy can lead to a win-win situation for firm profitability and consumer surplus. Moreover, under certain circumstances, anti-protection policies can simultaneously raise product quality, firm profitability and consumer surplus. The rationale behind the positive impacts of piracy and anti-protection policies is rooted in the influences of loss aversion behavior on consumer purchase decisions. The results show that it is essential to quantify the degree of consumer loss aversion for firms in formulating pricing and quality strategies and for policymakers to develop copyright protection policies.</p>

Quality Disclosure Under Consumer Loss Aversion

Consumers experience a sense of loss when a product’s quality does not match their expectations. To alleviate consumer loss aversion (CLA), firms can disclose information to reduce consumers’ uncertainty about product quality and the resulting psychological loss. In this paper, we investigate the implications of CLA on firm profit, consumer surplus, and social welfare when firms endogenously make quality disclosure decisions. We find that CLA leads symmetric firms to disclose quality more often. Given that CLA weakly reduces consumers’ utility from buying a product and quality disclosure is costly, intuition suggests that CLA is detrimental to firms. We find that this intuition is true only in a monopoly. Surprisingly, CLA makes both firms in a competition better off. Moreover, CLA increases firms’ profit when they invest in quality disclosure instead of money-back guarantees to respond to CLA. We also find that CLA decreases consumer surplus and social welfare. Therefore, educating consumers to improve decision-making skills by deliberating on future outcomes and emotions can benefit firms at the cost of consumers and society. When firms disclose quality sequentially, CLA can discourage the follower from disclosing quality. A strong level of CLA increases the leader’s profit over the follower’s, thereby encouraging firms to be the first mover in quality disclosure.This paper was accepted by Juanjuan Zhang, marketing.

Impact of Consumer Loss Aversion on Operations in the Context of Remanufacturing

Loss aversion is an important psychological characteristic that has become well supported in finance and marketing. This paper introduces consumer loss aversion into the game model with two substitutable products in a remanufacturing system. The loss-averse consumers gain utility from comparing the price and value dimensions with the superior product. Our model highlights alternative products competition, product selections, and consumption psychology in a remanufacturing environment. The results show that consumer loss aversion has important implications on key decisions in the remanufacturing system. When the manufacturer faces loss-averse consumers, there is a tendency to charge higher prices for two types of products. At the same time, the sales prices increase with the degree of loss aversion. Further analysis reveals that if the manufacturer manipulates consumers with a high probability of purchase, the feature of loss aversion usually benefits him. Our theoretical analyses are proven by numerical computation and some useful conclusions are summarized in this paper.

Quality Reference in Consumer Product Recalls

ABSTRACTProduct recalls are often associated with quality failures and may negatively affect customer satisfaction and firm performance. Motivated by counterintuitive anecdotal evidence on the positive relationship between recalls and sales, we develop an endogenous consumer reference model with stochastic quality levels and consumer valuation of gain‐loss utility to examine the consumer's willingness to buy in the event of a recall. A consumer makes purchasing decisions by evaluating gain‐loss values against a quality reference point. The theory of endogenous reference points incorporates the consumer's expectations of buying into forming a reference point based on the consumer's beliefs about quality outcomes (Kőszegi & Rabin, 2006, 2007). The uncertainty of the consumer's quality expectations combined with the consumer's personal equilibrium makes the reference point endogenous, generating predictions different from those under conventional exogenous reference point and in the case of deterministic quality expectations. We find that a product recall may revise the consumer's belief toward a more negative quality outcome, and therefore, a lower reference point, when quality expectations are uncertain and the consumer's reference point is endogenous. The consumer expects a greater gain from buying the product against the lower reference point, leading to a higher willingness to buy. In addition, we find that supply chain offshoring, which may be associated with consumer evaluation of gain‐loss utility or consumer loss aversion, may complicate the effect of recalls on a consumer's willingness to buy. These results suggest that firms should consider consumer preferences under uncertainty when designing and developing their global supply chain strategies in quality management.

Quality Disclosure Under Consumer Loss Aversion

Consumers experience a sense of loss when a product's quality does not match their expectations. To alleviate consumer loss aversion (CLA), firms can disclose information to reduce consumers' uncertainty about product quality and the resulting psychological loss. In this paper, we investigate the implications of CLA on firm profit, consumer surplus, and social welfare when firms endogenously make quality disclosure decisions. We find that CLA leads symmetric firms to disclose quality more often. Given that CLA weakly reduces consumers' utility from buying a product and quality disclosure is costly, intuition suggests that CLA is detrimental to firms. We find that this intuition is only true in a monopoly. Surprisingly, CLA makes both firms in a competition better off. These effects are unique to CLA, while related emotion such as anticipated regret does not affect disclosure decisions or firm profits. Moreover, CLA increases firms' profit when they invest in quality disclosure instead of money-back guarantees to respond to CLA. We also find that CLA decreases consumer surplus and social welfare. Therefore, educating consumers to improve decision-making skills by deliberating on future outcomes and emotions can benefit firms at the cost of consumers and society. When firms disclose quality sequentially, CLA can discourage the follower from disclosing quality. A strong level of CLA increases the leader's profit over the follower's, thereby encouraging firms to be the first mover in quality disclosure.

Selling in Advance to Loss Averse Consumers

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.

Competitive persuasive advertising under consumer loss aversion

I present a model to describe the effects of persuasive advertising targeted at consumers with expectation-based reference-dependent preferences. Persuasive advertising is competitive and increases the salience of advertised products while decreasing the salience of competing products. Consumers’ gain–loss utility associated with the expectation to buy the most salient product is inflated, while gain–loss utility associated with the expectation to buy the least salient product is deflated. I show that under moderate levels of loss aversion and product differentiation persuasive advertising has strictly anti-competitive effects, whenever consumers are aware of prices but uncertain about their individual match value from a purchase.

Competitive Persuasive Advertising Under Consumer Loss Aversion

I present a model to describe the effects of persuasive advertising targeted at consumers with expectation-based reference-dependent preferences. Persuasive advertising is competitive and increases the salience of advertised products while decreasing the salience of competing products. Consumers’ gain-loss utility associated with the expectation to buy the most salient product is inflated, while gain-loss utility associated with the expectation to buy the least salient product is deflated. I show that under moderate levels of loss aversion and product differentiation persuasive advertising has strictly anti-competitive effects, whenever consumers are aware of prices but uncertain about their individual match value from a purchase.

The Impact of Consumer Loss Aversion on Returns Policies and Supply Chain Coordination

Product return is a common after-sale service. Existing literature has assumed loss neutral consumers, while in practice consumers are often more sensitive to utility losses than gains, i.e., customers are often loss averse. In this paper, we study the impact of such loss aversion on the retailer's optimal pricing and returns policies. We analyze three scenarios where the seller offers no refund, full refund and partial refund for the returned products. Under each scenario, the seller determines the optimal price, quantity, and refund amount (under partial refund case) in order to maximize the expected profit. Our results demonstrate that consumer loss aversion leads a no-refund retailer to charge lower price and order smaller quantity, has no impact on a full-refund retailer, and results in a more lenient returns policy for a partial-refund retailer. We also find contracts that coordinate supply chains selling to loss averse consumers. Therefore, this article sheds some lights on how the management of returns policies should be adapted when consumers are loss averse.

Warranty as a competitive dimension for remanufactured products under stochastic demand

Abstract The importance of the environmental performance of products and the processes for sustainable manufacturing is increasingly recognized, which leads many enterprises to focus on remanufacturing. As a result of the high degree of uncertainty in quality, quantity, and time of end-of-life (EOL) or end-of-use (EOU) products, there are differences in the consumers’ willingness to pay (WTP) for remanufactured products and new products. In order to improve the consumer satisfaction of remanufactured products and promote its sales, more and more vendors provide product warranty policy. As a kind of signal game, warranty mechanism can promote uncertainty product sales. This paper develops a newsvendor model which captures important features of remanufacturing system including demand uncertainty, consumer loss aversion, and consumer choice between new and remanufactured products. We show that consumer loss aversion has important influence to the decision-making of the manufacturer. Further analysis reveals that the manufacturer makes higher profits from warranty for remanufactured products. And as the degree of consumer loss aversion is higher, the manufacture usually charges lower prices for the products. Our numerical study substantiates the previous results and sharpens the insights into the impact on the decision-making and the drivers of performance of product warranty policy.

Nonparametric Demand Estimation in Differentiated Products Markets

I develop and apply a nonparametric approach to estimate demand in differentiated products markets. Estimating demand flexibly is key to addressing many questions in economics that hinge on the shape - and notably the curvature - of market demand functions. My approach applies to standard discrete choice settings, but accommodates a broader range of consumer behaviors and preferences, including complementarities across goods, consumer inattention, and consumer loss aversion. Further, no distributional assumptions are made on the unobservables and only limited functional form restrictions are imposed. Using California grocery store data, I apply my approach to perform two counterfactual exercises: quantifying the pass-through of a tax, and assessing how much the multi-product nature of sellers contributes to markups. In both cases, I find that estimating demand flexibly has a significant impact on the results relative to a standard random coefficients discrete choice model, and I highlight how the outcomes relate to the estimated shape of the demand functions.

Consumer loss aversion, product experimentation and tacit collusion

Two firms compete to attract loss averse consumers that are uncertain about how well the goods on sale fit their needs. To resolve valuation uncertainty, firms can allow prospective customers to test (experiment) their products before purchase. We investigate firms’ dynamic incentives to allow experimentation and analyze the resulting effects on the profitability and the stability of tacit collusion. Depending on the regulatory regime in place – i.e., whether experimentation is forbidden, mandated or simply allowed but not imposed (laissez-faire) – the degree of loss aversion has ambiguous effects both on the profits that firms can achieve through tacit collusion and on the stability of these agreements. While in static environments consumer welfare is always maximized by a policy that forbids experimentation, the opposite happens in a dynamic environment.

Loss aversion and the uniform pricing puzzle for media and entertainment products

The uniform pricing puzzle for vertically differentiated media and entertainment products (movies, books, music, mobile apps, etc.) is that a firm with market power sells high- and low-quality products at the same price even though quality is perfectly observable and price adjustments are not costly. We resolve this puzzle by assuming that consumers have an uncertain taste for quality and accounting for consumer loss aversion in monetary and consumption utilities. The novelty of our approach is that the so-called reference transaction is endogenously set as part of a “personal equilibrium” and is based only on past purchases of same-quality products.