Loss Aversion and Second-Degree Price Discrimination: A Theoretical Approach

Details

Supervisors

Johnen, Johannes

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale, à finalité approfondie

Abstract

This thesis presents a model of second-degree price discrimination when a monopolist faces loss-averse consumers. A consumer’s valuation is additively separable between a consumption utility function (which depends on the type), and a gain-loss utility function that is a↵ected by deviations from a reference consumption plan. This consumption plan is determined after the consumers find out their type. Moreover, we assume that the monopolist is able to make each consumer type expect to buy a specific variety of goods. We find that loss aversion increases the likelihood that o↵ering a single product to all consumers is the optimal choice for the monopolist. We also show the conditions for menu pricing to be optimal for the monopolist, and derive the welfare e↵ects of loss aversion on the standard menu pricing model.