Quality Disclosure Under Consumer Loss Aversion

2020 ◽  
Author(s):  
Jianqiang Zhang ◽  
Krista J. Li
Keyword(s):  
Decision Making ◽  
Social Welfare ◽  
Loss Aversion ◽  
Consumer Surplus ◽  
Quality Disclosure ◽  
Disclosure Decisions ◽  
Future Outcomes ◽  
The Cost ◽  
Firm Profit ◽  
First Mover

Consumers experience a sense of loss when a product’s quality does not match their expectations. To alleviate consumer loss aversion (CLA), firms can disclose information to reduce consumers’ uncertainty about product quality and the resulting psychological loss. In this paper, we investigate the implications of CLA on firm profit, consumer surplus, and social welfare when firms endogenously make quality disclosure decisions. We find that CLA leads symmetric firms to disclose quality more often. Given that CLA weakly reduces consumers’ utility from buying a product and quality disclosure is costly, intuition suggests that CLA is detrimental to firms. We find that this intuition is true only in a monopoly. Surprisingly, CLA makes both firms in a competition better off. Moreover, CLA increases firms’ profit when they invest in quality disclosure instead of money-back guarantees to respond to CLA. We also find that CLA decreases consumer surplus and social welfare. Therefore, educating consumers to improve decision-making skills by deliberating on future outcomes and emotions can benefit firms at the cost of consumers and society. When firms disclose quality sequentially, CLA can discourage the follower from disclosing quality. A strong level of CLA increases the leader’s profit over the follower’s, thereby encouraging firms to be the first mover in quality disclosure. This paper was accepted by Juanjuan Zhang, marketing.

scholarly journals Transparency of Behavior-Based Pricing

2019 ◽  
Vol 57 (1) ◽  
pp. 78-99 ◽  
Author(s):  
Xi Li ◽  
Krista J. Li ◽  
Xin (Shane) Wang
Keyword(s):  
Social Welfare ◽  
Consumer Surplus ◽  
Unintended Consequences ◽  
History Data ◽  
Consumer Data ◽  
Behavior Based ◽  
The Cost ◽  
Firm Profit ◽  
Commitment Device

Behavior-based pricing (BBP) refers to the practice in which firms collect consumers’ purchase history data, recognize repeat and new consumers from the data, and offer them different prices. This is a prevalent practice for firms and a worldwide concern for consumers. Extant research has examined BBP under the assumption that consumers observe firms’ practice of BBP. However, consumers do not know that specific firms are doing this and are often unaware of how firms collect and use their data. In this article, the authors examine (1) how firms make BBP decisions when consumers do not observe whether firms perform BBP and (2) how the transparency of firms’ BBP practice affects firms and consumers. They find that when consumers do not observe firms’ practice of BBP and the cost of implementing BBP is low, a firm indeed practices BBP, even though BBP is a dominated strategy when consumers observe it. When the cost is moderate, the firm does not use BBP; however, it must distort its first-period price downward to signal and convince consumers of its choice. A high cost of implementing BBP serves as a commitment device that the firm will forfeit BBP, thereby improving firm profit. By comparing regimes in which consumers do and do not observe a firm’s practice of BBP, the authors find that transparency of BBP increases firm profit but decreases consumer surplus and social welfare. Therefore, requiring firms to disclose collection and usage of consumer data could hurt consumers and lead to unintended consequences.

scholarly journals Dopamine-dependent loss aversion during effort-based decision-making

2019 ◽  
Author(s):  
Xiuli Chen ◽  
Sarah Voets ◽  
Ned Jenkinson ◽  
Joseph M. Galea
Keyword(s):  
Parkinson’S Disease ◽  
Decision Making ◽  
Parkinson's Disease ◽  
Loss Aversion ◽  
Brain Regions ◽  
Decision Making Under Risk ◽  
Physical Effort ◽  
Clinical Disorders ◽  
The One ◽  
The Cost

AbstractFrom psychology to economics there has been substantial interest in how costs (e.g., delay, risk) are represented asymmetrically during decision-making when attempting to gain reward or to avoid punishment. For example, in decision-making under risk, individuals show a tendency to prefer to avoid punishment than to acquire the equivalent reward (loss aversion). Although the cost of physical effort has received significant recent attention due to the evaluation of motor costs being crucial in our daily decisions, it remains unclear whether loss aversion exists during effort-based decision-making. On the one hand, loss aversion may be hardwired due to asymmetric evolutionary pressure on losses and gains and therefore exists across decision-making contexts. On the other hand, distinct brain regions are involved with different decision costs, making it questionable whether similar asymmetries exist. Here, we demonstrate that young healthy participants exhibit loss aversion during effort-based decision-making by exerting more physical effort in order to avoid punishment than to gain a same-size reward. Next, we show that medicated Parkinson’s disease (PD) patients show a reduction in loss aversion compared to age-matched controls. Behavioural and computational analysis revealed that people with PD exerted similar physical effort in return for a reward, but were less willing to produce effort in order to avoid punishment. Therefore, loss aversion is present during effort-based decision-making and can be modulated by altered dopaminergic state. This finding could have important implications for our understanding of clinical disorders that show a reduced willingness to exert effort in the pursuit of reward.Significance StatementLoss aversion – preferring to avoid punishment than to acquire equivalent reward – is an important concept in decision-making under risk. However, little is known about whether loss aversion also exists during decisions where the cost is physical effort. This is surprising given that motor cost shapes human behaviour, and a reduced willingness to exert effort is a characteristic of many clinical disorders. Here, we show that healthy individuals exert more effort to minimise punishment than to maximise reward (loss aversion). We also demonstrate that loss aversion is modulated by altered dopaminergic state by showing that medicated Parkinson’s disease patients exert similar effort to gain reward but less effort to avoid punishment. Therefore, dopamine-dependent loss aversion is crucial for explaining effort-based decision-making.

Framework for Decision-Making

2013 ◽  
Author(s):  
Louis Kaplow
Keyword(s):  
Decision Making ◽  
Social Welfare ◽  
False Positives ◽  
Behavioral Effects ◽  
Economic Approach ◽  
Legal Standards ◽  
Competition Rules ◽  
Arbitrary Weight ◽  
The Cost ◽  
Desirable Behavior

This chapter presents a framework for assessing competition rules. An economic approach to limiting coordinated oligopolistic price elevation seeks to determine liability and apply sanctions based primarily on the deterrence benefits that result as well as any chilling of desirable behavior that may ensue, while also considering the expense of operating the regime. In assessing the cost of false positives, attention focuses on incidental negative behavioral effects, not on mistakes that are defined by reference to proxy legal standards and then given arbitrary weight. An example that will prove important involves imposing sanctions on firms that actually charged elevated oligopoly prices, the prospect of which deters such behavior. This outcome is favorable in terms of social welfare but under some legal standards would be deemed to be an undesirable error in cases in which the firms did not employ forbidden modes of communication.

scholarly journals Evolutionary Game Analysis on Strategies in “Main Manufacturer–Supplier” Mode Considering Technology Docking and Price Concluding under Competition Condition

Mathematics ◽  
2019 ◽  
Vol 7 (12) ◽  
pp. 1184
Author(s):  
Ming Zhang ◽  
Jianjun Zhu ◽  
Hehua Wang ◽  
Pei Liu
Keyword(s):  
Decision Making ◽  
Evolutionary Game Theory ◽  
Evolutionary Game ◽  
Game Analysis ◽  
Complex Products ◽  
Competition Condition ◽  
Managerial Implications ◽  
The Cost ◽  
First Mover

This paper analyses the strategies of the substitutable suppliers competing to collaborate with a main manufacturer in “main manufacturer–supplier” (M-S) mode. In the research and development (R&D) of complex products, only one supplier can be chosen for one kind of part as a long-term collaboration partner with the manufacturer. The competition between substitutable suppliers focuses on the technology docking and price-concluding strategies. In this paper, one original supplier as the first-mover and one new supplier as the second-mover chose between the two strategies sequentially to compete for the collaborative preference of the manufacturer. We also took the delay cost brought by strategy changing into the consideration of the risks, which the suppliers and the manufacturer should prepare to share. With evolutionary game theory applied, we can conclude that the initial costs have little impact on suppliers’ making decisions, while the initial prices are correlated with both suppliers’ decision making. Results also show that hesitation and fluctuation periods exist in suppliers’ decision making, which have a relationship with existing strategy conditions, initial prices, and the cost caused by modifying the part. These results provide practical and reasonable managerial implications for M-S collaboration.

Research on Bias of Owner's Decision-Making in Risk-Sharing in Construction Project - A Perspective of Bounded Rationality

2013 ◽  
Vol 357-360 ◽  
pp. 2164-2170
Author(s):  
Yi Lin Yin ◽  
Zhi Chao Xu ◽  
Qing Song Zou
Keyword(s):  
Decision Making ◽  
Risk Management ◽  
Quantitative Analysis ◽  
Bounded Rationality ◽  
Loss Aversion ◽  
Risk Sharing ◽  
Dominant Strategy ◽  
Game Model ◽  
Ex Post ◽  
The Cost

Bounded rationality has an important impact on owners decision-making of risk-sharing in the project. Based on the hypothesis of bounded rationality, the paper established a risk-sharing game model concerning owners reference dependency and loss aversion, as well as conducted the quantitative analysis. The finding shows that comparing with the hypothesis of rationality, if taking the ex-post transaction cost as reference, when owner considers that the cost of risk management is smaller, the bounded rationality would make the owner prefer the proper risk-sharing; when owner considers that the cost of risk management is larger, the owner would prefer the improper risk-sharing; when the objective cost of risk management is larger than the ex-post transaction, the improper risk-sharing would be owners dominant strategy, and bounded rationality has no impact on owners decision-making of risk-sharing.

Emotional Choices

2018 ◽  
Author(s):  
Robin Markwica
Keyword(s):  
Decision Making ◽  
Choice Behavior ◽  
Choice Theory ◽  
Cuban Missile Crisis ◽  
Coercive Diplomacy ◽  
The Core ◽  
Present Book ◽  
Action Model ◽  
The Cost ◽  
Dynamic Interplay

In coercive diplomacy, states threaten military action to persuade opponents to change their behavior. The goal is to achieve a target’s compliance without incurring the cost in blood and treasure of military intervention. Coercers typically employ this strategy toward weaker actors, but targets often refuse to submit and the parties enter into war. To explain these puzzling failures of coercive diplomacy, existing accounts generally refer to coercers’ perceived lack of resolve or targets’ social norms and identities. What these approaches either neglect or do not examine systematically is the role that emotions play in these encounters. The present book contends that target leaders’ affective experience can shape their decision-making in significant ways. Drawing on research in psychology and sociology, the study introduces an additional, emotion-based action model besides the traditional logics of consequences and appropriateness. This logic of affect, or emotional choice theory, posits that target leaders’ choice behavior is influenced by the dynamic interplay between their norms, identities, and five key emotions, namely fear, anger, hope, pride, and humiliation. The core of the action model consists of a series of propositions that specify the emotional conditions under which target leaders are likely to accept or reject a coercer’s demands. The book applies the logic of affect to Nikita Khrushchev’s decision-making during the Cuban missile crisis in 1962 and Saddam Hussein’s choice behavior in the Gulf conflict in 1990–91, offering a novel explanation for why coercive diplomacy succeeded in one case but not in the other.

Emotional stress & decision-making: an emotional stressor significantly reduces loss aversion

Stress ◽  
2021 ◽  
pp. 1-7
Author(s):  
Francisco Molins ◽  
Carla Ayuso ◽  
Miguel Ángel Serrano
Keyword(s):  
Decision Making ◽  
Emotional Stress ◽  
Loss Aversion

scholarly journals Economic Value of Terminal Aerodrome Forecasts at Incheon Airport, South Korea

2021 ◽  
Vol 13 (12) ◽  
pp. 6965
Author(s):  
In-Gyum Kim ◽  
Hye-Min Kim ◽  
Dae-Geun Lee ◽  
Byunghwan Lim ◽  
Hee-Choon Lee
Keyword(s):  
Decision Making ◽  
South Korea ◽  
Co2 Emissions ◽  
Fuel Efficiency ◽  
Economic Value ◽  
Analysis Data ◽  
Annual Average ◽  
Loss Model ◽  
Total Budget ◽  
The Cost

Meteorological information at an arrival airport is one of the primary variables used to determine refueling of discretionary fuel. This study evaluated the economic value of terminal aerodrome forecasts (TAF), which has not been previously quantitatively analyzed in Korea. The analysis data included 374,716 international flights that arrived at Incheon airport during 2017–2019. A cost–loss model was used for the analysis, which is a methodology to evaluate forecast value by considering the cost and loss that users can expect, considering the decision-making result based on forecast utilization. The value was divided in terms of improving fuel efficiency and reducing CO2 emissions. The results of the analysis indicate that the annual average TAF value for Incheon Airport was approximately 2.2 M–20.1 M USD under two hypothetical rules of refueling of discretionary fuel. This value is up to 26.2% higher than the total budget of 16.3 M USD set for the production of aviation meteorological forecasts by the Korea Meteorological Administration (KMA). Further, it is up to 10 times greater than the 2 M USD spent on aviation meteorological information fees collected by the KMA in 2018.

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