Firm Behavior under Consumer Loss Aversion

Abstract

This survey aims to provide an overview of recent developments in the industrial organization literature that explores the behavior of profit-maximizing firms facing consumers with reference-dependent preferences and loss aversion. We discuss the implications of loss aversion on the practice of price discrimination, product differentiation, and incentive provision, among others. A common theme is emerging from these studies: consumer loss aversion may serve to limit the benefits from complex firm strategies that depend on the realizations of uncertainty.