Department of Economics and Business Economics

Consumer loss aversion and scale-dependent psychological switching costs

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  • Heiko Karle, Frankfurt School of Finance and Management
  • ,
  • Heiner Schumacher, University of Innsbruck
  • ,
  • Rune Vølund

We consider a model of product differentiation where consumers are uncertain about the qualities and prices of firms' products. They can inspect all products at zero cost. A share of consumers is expectation-based loss averse. For these consumers, buying products of varying quality and price creates disutility from gain-loss sensations. Even at modest degrees of loss aversion they may refrain from inspecting all products and choose an individual default that is strictly dominated in terms of surplus. Firms' strategic behavior exacerbates the scope for this effect. The model generates “scale-dependent psychological switching costs” that increase in the value of the transaction. They imply that making switching easier or costless for consumers would not motivate more switching.

Original languageEnglish
JournalGames and Economic Behavior
Pages (from-to)214-237
Number of pages24
Publication statusPublished - Mar 2023

    Research areas

  • Competition, Loss aversion, Switching costs

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