Pricing and Information Disclosure in Markets with Loss-Averse Consumers

Résumé

We develop a theory of imperfect competition with loss-averse consumers. All consumers are fully informed about match value and price at the time they make their purchasing decision. However, a share of consumers is initially uncertain about their tastes and forms a reference point consisting of an expected match value and an expected price distribution, while the other consumers are perfectly informed all the time. Loss aversion in the match value dimension leads to less competitive outcome, while loss aversion in the price dimension leads to a more competitive outcome. Thus a market with uninformed consumers may be more or less competitive than a market with informed consumers. We explore the interplay between these two effects. We, also, derive implications for firm strategy and public policy concerning the firms’ incentives to “educate” consumers about their own tastes. In particular, we show that private incentives to disclose information early on may be socially insufficient.