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Reference dependence and market competition

Zhou, J.; (2009) Reference dependence and market competition. (ELSE Working Papers 341). ESRC Centre for Economic Learning and Social Evolution: London, UK. Green open access

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Abstract

This paper studies the implications of consumer reference dependence for market competition. If consumers take some product (e.g., the first product they consider) as the reference point when evaluating others and exhibit loss aversion, then the more “prominent” firm whose product is taken as the reference point by more consumers will randomize over a high and a low price. We also find that loss aversion in the price dimension intensifies the price competition while that in the product dimension softens the price competition. Consumer reference dependence can also shape firms’ advertising strategies. If advertising increases product prominence, ex ante identical firms may differentiate their advertising intensities and asymmetric prominence between firms can arise as an equilibrium outcome.

Type: Working / discussion paper
Title: Reference dependence and market competition
Open access status: An open access version is available from UCL Discovery
Publisher version: http://else.econ.ucl.ac.uk/newweb/papers.php#2009
Language: English
Additional information: Please also see http://eprints.ucl.ac.uk/17504/ for the Munich Personal RePEc Archive Series working paper version
Keywords: Advertising, loss aversion, price competition, prominence, reference dependence
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/18669
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