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- Title
Competing to Sell the Reference Product.
- Authors
Martínez-Sánchez, Francisco
- Abstract
In a sequential model of vertical product differentiation in which consumers are loss-averse, I analyse how firms compete to sell the reference product when they set prices. I find that there are two subgame perfect equilibria: one where the reference point for all consumers is the higher-quality product; and the other where the reference point is the lower-quality product. However, applying the risk-dominance criterion, I obtain that the sole risk-dominant equilibrium is for the higher-quality firm to sell the reference product. Since the hedonic price of the higher-quality product is the highest, consumers do not suffer any psychological disutility in the risk-dominant equilibrium.
- Subjects
PRODUCT differentiation; PRICES; CONSUMERS; MARKET leaders; LOSS aversion
- Publication
Review of Industrial Organization, 2024, Vol 64, Issue 4, p515
- ISSN
0889-938X
- Publication type
Article
- DOI
10.1007/s11151-024-09950-4