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Monopoly pricing when consumers are antagonized by unexpected price increases: a "cover version" of the Heidhues-Koszegi-Rabin model

Spiegler, R.; (2010) Monopoly pricing when consumers are antagonized by unexpected price increases: a "cover version" of the Heidhues-Koszegi-Rabin model. (ELSE Working Papers 369). ESRC Centre for Economic Learning and Social Evolution: London, UK. Green open access

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Abstract

This paper reformulates and simpli�fies a recent model by Heidhues and Koszegi (2005), which in turn is based on a behavioral model due to Koszegi and Rabin (2006). The model analyzes optimal pricing when consumers are loss averse in the sense that an unexpected price hike lowers their willingness to pay. The main message of the Heidhues-Koszegi model, namely that this form of consumer loss aversion leads to rigid price responses to cost fluctuations, carries over. I demonstrate the usefulness of this "cover version" of the Heidhues-Koszegi-Rabin model by obtaining new results: (1) loss aversion lowers expected prices; (2) the firm's incentive to adopt a rigid pricing strategy is stronger when fluctuations are in demand rather than in costs.

Type: Working / discussion paper
Title: Monopoly pricing when consumers are antagonized by unexpected price increases: a "cover version" of the Heidhues-Koszegi-Rabin model
Open access status: An open access version is available from UCL Discovery
Publisher version: http://else.econ.ucl.ac.uk/newweb/papers.php#2010
Language: English
UCL classification: UCL > School of Arts and Social Sciences > Faculty of Social and Historical Sciences > Economics
URI: http://discovery.ucl.ac.uk/id/eprint/19474
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