Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs

Publication Type:
Journal Article
Citation:
RAND Journal of Economics, 2016, 47 (3), pp. 709 - 733
Issue Date:
2016-09-01
Metrics:
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© 2016, The RAND Corporation. This article derives the optimal pricing and product-availability strategies for a retailer selling two substitute goods to loss-averse consumers and shows that limited-availability sales manipulate consumers into an ex ante unfavorable purchase. The seller maximizes profits by raising the consumers' reference point through a tempting discount on a good available only in limited supply (the bargain), and cashing in with a high price on the other (the rip-off), which consumers buy if the bargain is not available to reduce their disappointment. The seller might prefer to offer a deal on the more valuable product, using it as a bait.
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