Loss-averse Consumers Research Articles

Dual-Channel Supply Chain Coordination with Loss-Averse Consumers

Most studies on supply chain coordination assume that consumers are rational. However, with the development of e-commerce, consumer-bounded rationality has become an important issue with respect to supply chain coordination. Based on the assumption that some consumers are loyal to the offline shop and others are reference-dependent, this article examines the mechanism of vertical restraints and their competitive effects. This research study found that compared with the assumption of rational consumers used in previous literature, vertical restraints help internalize the “channel price gap externality” when consumers are loss averse. When separately operating, the offline shop will set a higher price due to its consumers’ higher loyalty and willingness to pay. However, given the positive externality of this price to the online retail sales, the offline price is still lower than the level under vertical integration. When the upstream manufacturer achieves supply chain coordination with vertical restraint contracts, the channel price gap externality is internalized, and the channel price gap expands to stimulate loss-averse consumers’ purchasing decisions.

Screening Loss-Averse Consumers

Screening Loss-Averse Consumers

‘Tacit’ Bundling Among Rivals: Limited Availability Bargains to Loss-Averse Consumers

‘Tacit’ Bundling Among Rivals: Limited Availability Bargains to Loss-Averse Consumers

Price versus quantity in a duopoly of vertical differentiation with loss-averse consumers

In a model à la Mussa and Rosen (1978) in which consumers are loss-averse, I check the robustness of the result obtained by Tanaka (2001). As he did, I find that the quantity contract is a dominant strategy for both firms. Thus, Cournot is the outcome in equilibrium. Finally, I find that loss aversion in general intensifies competition.

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.

Dynamic oligopoly pricing with reference-price effects

We analyze the strategic implications of consumers’ reference-price effects, either symmetric (for loss-neutral consumers) or asymmetric (for loss-averse consumers), in a differentiated oligopoly model where firms compete either in prices (à la Bertrand) or in quantities (à la Cournot) over an infinite time horizon. The dynamic game is specified in continuous time. The solution concept is Markov Perfect Equilibrium. We show how price dynamics in the presence of reference-price effects crucially depends on the nature of market competition. One of the main results of our analysis is that, with loss-averse consumers, there exists an interval of initial reference prices such that firms adopt the same constant-pricing strategy in both the Bertrand and the Cournot games, implying that the distinction between price and quantity competition has no impact on market conduct and performance.

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.

Pricing Strategy in Dual-Channel Supply Chains with Loss-Averse Consumers

In this paper, loss-averse consumer behavior during purchase decision-making process in the dual-channel supply chain is modeled. Loss-averse consumers prefer avoiding losses to gain utility with respect to their reference point while purchasing the product. Two product categories are classified: (1) basic product and (2) luxury goods which have lower and higher reference utility to consumers, respectively. The research objective is to determine the optimal price strategy in dual-channel supply chains and discuss the decision behind loss-averse consumers. To model consumers’ valuation of a product, prospect theory is adopted to calculate the demands of each channel. Then, the optimal pricing strategy and the corresponding profits are found out in a Stackelberg game manner. The results encourage manufacturers of basic goods to engage in dual-channel strategy. Effect of “double marginalization” is reduced if consumers are loss-averse in the dual-channel supply chain. Furthermore, the direct channel online contributes larger demand to the manufacturer. However, manufacturers of luxury goods are not suggested for dual-channel strategy because the demand for direct channel online is negligible and the demand for the retail channel remains unchanged. Nevertheless, retailers cannot obtain benefit from dual-channel and as a result, the profit of basic goods retailers will be reduced.

Outcome Uncertainty, Fan Travel, and Aggregate Attendance

The classical Uncertainty of Outcome Hypothesis (UOH) informs economists’ understanding consumer decisions to attend sporting events and models of team revenue generation. Coates, Humphreys and Zhou (2014) developed a reference dependent preference based consumer choice model under uncertainty to motivate the UOH in which loss-averse consumers prefer games with certain outcomes. We develop an alternative model based on a standard expected utility model of fan behavior which incorporates fans’ decisions to travel to away games and aggregates decisions across local and visiting fans. This model generates predictions consistent with the classical UOH and concave team and league-wide total revenue functions.

The effects of loss aversion on deceptive advertising policies

We extend the deceptive advertising model of Piccolo et al. (RAND J Econ 46(3):611–624, 2015) to a framework in which consumers may be loss averse. There are two sellers, competing on prices and offering experience goods with some differences in quality. Prospective customers may be harmed by deceptive advertising: a marketing practice that can induce them to make bad purchases. We show that although deceptive advertising occurs depending on the degree of consumers’ loss aversion, this behavioral bias does not reflect on firms’ prices. Nevertheless, the presence of loss-averse consumers crucially changes the optimal deterrence rule that a Public Authority should adopt against false claims and misleading advertising. Unlike Piccolo et al. (2015), in this more general model, strong enforcements may improve the buyer welfare according to the degree of loss aversion.

Loss aversion, upset preference, and sports television viewing audience size

A growing body of research examines the effect of loss aversion (LA) on consumers' decisions to watch or attend sporting events. Much of this research focuses on live game attendance. In contrast to the predictions of uncertainty of outcome hypothesis (UOH), loss-averse consumers prefer watching either potential upsets, or dominant performances by strong favorites, to events with uncertain outcomes. We test for LA vs. UOH effects in television viewing audience data for free over-the-air broadcasts of 304 Spanish football matches from 2008/09 to 2015/16. This setting generates substantial variation home team win probabilities because of the presence of two dominant teams (Real Madrid CF and FC Barcelona). The results support the importance of LA/upset preferences: audience size for matches when home teams are large underdogs and when heavily favored are larger than for matches with uncertain outcomes, even when controlling for observable and unobservable factors affecting the number of viewers.

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.

Fresh-Keeping Effort and Channel Performance in a Fresh Product Supply Chain with Loss-Averse Consumers’ Returns

We consider a fresh product supply chain consisting of one fresh product supplier and one e-tailer. Supplier sells fresh products through e-tailer in an online market, and the e-tailer offers a full-refund return policy to loss-averse consumers and exerts a fresh-keeping effort to keep the product at the optimum freshness level. By developing an analytical model, we derive the optimal price, quantity, and fresh-keeping effort jointly and verify that it is unique in the centralized setting. Based on the comparison, we demonstrate that the e-tailer’s profit is greater with fresh-keeping effort than without it; therefore, the e-tailer has an incentive to engage in fresh-keeping effort. We also show that the return rate is independent of the fresh-keeping effort and consumers’ loss aversion. In the decentralized setting, we first characterize the optimal wholesale price by the numerical study and then find that although the buyback contract still works, the revenue-sharing contract fails to achieve channel coordination under our model formulation. Furthermore, we develop a revenue- and cost-sharing contract that can coordinate the supply chain by designing a new contractual mechanism. Our numerical studies offer the Pareto improvement regions under the buyback and revenue- and cost-sharing contracts in which the supplier and e-tailer can earn more expected profits compared with being under wholesale price contract.

A higher rebound effect under bounded rationality: Interactions between car mobility and electricity generation

It is widely believed that with the right economic incentives, electrification of transport can significantly reduce CO2 emissions by 2050. Estimates of future emissions from car transport tend, though, to ignore technological change in electricity generation and bounded rationality of consumers. In this article we address these two shortcomings by developing a novel approach that captures the dynamic interdependence between the car industry and electricity generation. We assess how incorporating realistic behaviors affects estimates of emissions from passengers cars in four models of vehicle adoption, namely with rational, myopic, habit-oriented and loss-aversive consumers. This is then combined with three behavioral models of travel distance, describing rational, habitual and loss-averse drivers. In the electricity sector, technological change occurs through installation of new power plants embodying different energy technologies. This allows us to study the impact of policies promoting renewable energy on the price of electricity, and indirectly on the rate of adoption of electric cars. The findings indicate that substituting renewable energy for fossil fuels in electricity generation by 2050 can triple the electricity price. This undermines the positive effect of subsidies on electric car adoption, with the specific effect depending on particular behaviors assumed to hold. In addition, we show that myopic and loss-averse consumers buy on average less fuel-efficient cars than rational agents. Habitual drivers tend to commute larger distances than rational ones, as they do not adjust their behavior optimally to changes in fuel prices and improvements in fuel efficiencies. These behavioral effects contribute to the rebound effect. Our findings indicate that vehicle choice and driving under rational behavior generate consistently the lowest estimates of life-cycle emissions. By ignoring more realistic behaviors consistent with bounded rationality, current studies underestimate emissions from passenger cars, in turn contributing to overly optimistic expectations about policy impacts.

A Marketing Strategy in a Closed-Loop Supply Chain with Loss-Averse Consumers

The importance of remanufacturing system has been extensively investigated in recent years. Taking into account the consumer valuation uncertainty and the demand uncertainty, this paper addresses the issue of closed-loop supply chain with remanufacturing by game theory. We consider two types of consumers in the market: loss-neutral consumers and loss-averse consumers. The loss-neutral consumers are completely rational. The loss-averse consumers, on the other hand, are with losses being more painful than equal-sized gains being pleasant. When multichannel structure can be chosen, the manufacturer has three pricing strategies in direct market: (1) keeping the price high with a small discount, no customers choose the online store; (2) keeping the price high with a moderate discount, only the loss-neutral customers choose the online store; (3) keeping the price low with a big discount, all customers choose the online store. Consumers make up their decisive selections through comparing the price and channel attributes. We introduce utility function for analyzing the market demand and then identify the optimal pricing and channel strategy to maximize the manufacturer’s profit. Finally, the rationality and validities of the proposed model are illustrated by numerical examples, and sensitivity analyses of the parameters are also presented.

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.

Does Loss Aversion Preclude Price Variation?

Problem definition: In modern retailing, frequent discounts are seemingly at odds with the idea that price variation antagonizes loss-averse consumers and hence, diminishes their demand for products and services. Our research question then is whether (or not) loss aversion rules out price variation—and in particular, cyclic pricing. Academic/practical relevance: Pricing and revenue management subject to behavioral considerations are key research areas in operations management. Our approach contributes to this research by highlighting the importance of incorporating heterogeneity in consumers’ behavioral responses in pricing models. Methodology: We model a monopolist selling a product over time to loss-averse consumers who differ in their sensitivity to gains/losses. Although the market is thus segmented, the firm cannot price discriminate among consumers based on that sensitivity. We then characterize the structural properties of the firm’s optimal pricing policy. Results: We show that charging a long-run constant price may be suboptimal and then derive conditions under which the optimal policy is cyclic. These findings establish that loss aversion does not preclude price variation and thereby, underscore the importance of incorporating consumer heterogeneity into pricing policies. Managerial implications: For operations management scholars, our model highlights the importance of heterogeneity in consumers’ behavioral responses to firms’ policies and shows that structurally different insights are obtained from pricing models if this heterogeneity is appropriately accounted for. This approach offers new avenues in pricing and revenue management research. For managers, our model suggests that they could vary prices, under certain conditions, without worrying that price variation will antagonize consumers. Our model offers insights on what these conditions are, which managers may incorporate in devising the pricing policies.

Does Loss Aversion Preclude Price Variation?

In modern retailing, frequent discounts are seemingly at odds with the idea that price variation antagonizes loss-averse consumers and hence diminishes their demand for products and services. We model a monopolist selling a product over time to loss-averse consumers who differ in their sensitivity to losses. Although the market is thus segmented, the firm cannot price-discriminate among consumers based on that sensitivity. We show that charging a long-run constant price may be suboptimal and then derive conditions under which the optimal policy is cyclic (e.g., a periodic markdown policy). These findings establish that loss aversion does not preclude price variation and thereby underscore the importance of incorporating consumer heterogeneity into pricing policies.

Non-differentiated green product positioning: Roles of uncertainty and rationality

This study examines the effect of market uncertainty and consumer rationality on product strategy when a company evaluates its entry into the green market. The risk in launching a green product is high because consumers may not be as environmentally conscious as they claim to be. This study develops a composite condition consisting of preference uncertainty, loss aversion, investment cost, and competition intensity to guide companies to react either conservatively or aggressively. An upgraded non-differentiation strategy is suggested for heterogeneous markets, loss-averse consumers, or high-quality reference when the indicator falls within the greenness range. Unlike conventional competitive analysis for non-green products, differentiation may not always be the best option to benefit the entire society and non-differentiation to green is favorable in the context of our analysis.

De-targeting: Advertising an assortment of products to loss-averse consumers

We consider product markets in which single-product firms sell differentiated products to consumers through an intermediary. Consumers are interested only in a specific product category, but do not know before inspection which products belong to this category. An intermediary knows each consumer’s preferred product category and which products belong to it. It makes personalized product announcements to consumers. Such targeted advertising reduces overall advertising costs and, as a direct effect, maximizes industry profits. However, as we show in this paper, when consumers form reference prices and are loss averse, announcing additional products relaxes competition between firms. As a result, firms may earn higher profits from “de-targeting”; i.e., when the intermediary deliberately informs about some products and their price quotes from outside a consumer’s preferred product category.