Consumer price effects: Loss aversion in value vs. in demand

Research output: Contribution to journalArticleScientificpeer-review

Researchers

Research units

  • Hanken School of Economics

Abstract

It has been established that consumers are often loss averse in the sense that perceived value decreases to a greater extent as a result of a price increase than what it increases as a result of an equal price decrease. We examine a previously scarcely studied question: how is the change in a product’s perceived value following a price change reflected in the product’s market demand? To complement the notion of loss averse (vs. gain seeking) price behaviour in perceived value, we provide a definition for loss averse (vs. gain seeking) price behaviour in demand. We discover that loss aversion in value does not necessarily lead to loss averse market demand, but can also lead to market demand being gain-seeking. We examine the boundary conditions for loss averse vs. gain seeking demand. Assuming that consumer preferences are given by a random utility model and the choice model is McFadden’s conditional logit, we develop a simple formula to check the character of the price behaviour. This provides novel insights by revealing an unexpected key determinant: the market share of the product under consideration. Finally, we consider the optimal price changes and what kind of consumer behaviour in demand they are related to.

Details

Original languageEnglish
Pages (from-to)1-9
Number of pages9
JournalJournal of the Operational Research Society
Publication statusE-pub ahead of print - 25 Jul 2019
MoE publication typeA1 Journal article-refereed

    Research areas

  • Reference price, loss aversion, conditional logit, brand choice

ID: 35689857