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We study optimal price discrimination when a monopolist faces a continuum of consumers with reference-dependent preferences. A consumer's valuation for product quality consists of an intrinsic valuation affected by a private state signal (type), and a gain-loss valuation that depends on deviations of purchased quality from a reference point. Following Koszegi Rabin (2006), we consider loss-averse buyers who evaluate gains and losses in terms of changes in the consumption valuation, but in our model each buyer evaluates consumption outcomes relative to his own state-contingent reference quality level. We capture the process by which reference qualities are formed via a reference consumption plan, and use a generalization of the Mirrlees representation of the indirect utility to fully characterize optimal contracts for loss-averse consumers. We find that, depending on the reference plan, optimal price discrimination may exhibit (i) downward distortions beyond the standard downward distortions due to screening; (ii) efficiency gains relative to second best contracts without loss aversion; (iii) upward distortions above first best quality levels without loss aversion. We consider ex-ante and ex-post consistent contracts in which quality offers by the firm coincide, in expectations or at every state realization, respectively, with the reference quality levels. We find the firm's unique preferred ex-ante and ex-post consistent contract menu and specify conditions under which, for the second case, it also constitutes the consumers' preferred menu.

The literature has shown that an increase in housing wealth, driven by unexpected shocks to house prices, exerts a positive effect on the birthrates of homeowners. According to canonical models, a decrease in housing wealth has a symmetric negative impact on the fertility behavior of households. That is, housing gains and losses of the same size have identical quantitative effects on fertility. In comparison, the reference-dependent preferences in prospect theory suggest that people care more about housing losses than equivalent gains, leading to an asymmetric effect of housing wealth on the fertility decision. We propose a theoretical model where household utility depends on both childbirth and housing wealth. In this model, the utility from housing wealth is reference dependent in the sense that we assume the housing value in the previous year is the reference. The theoretical model suggests that a decrease in housing wealth would have a larger impact on the probability of childbirth than an equivalent increase. We test this theoretical prediction using longitudinal data on Japanese households. Consistent with the theoretical prediction, our empirical results show that the fertility responses of homeowners are substantially larger for housing losses than equivalent gains.

Loss aversion can occur in riskless and risky choices. We present novel evidence on both in a non-student sample (660 randomly selected customers of a car manufacturer). We measure loss aversion in riskless choice in endowment effect experiments within and between subjects and find similar levels of average loss aversion in both. The subjects of the within study also participate in a simple lottery choice task which arguably measures loss aversion in risky choices. We find substantial heterogeneity in both measures of loss aversion. Loss aversion in riskless choice and loss aversion in risky choice are strongly positively correlated, but on average riskless loss aversion is higher than risky loss aversion. We find that in both choice tasks, loss aversion increases in age, income, and wealth, and decreases in education. Our results provide novel supportive input to the debate about the reality of loss aversion.

The present work aims to explore whether there exists a systematic frustration in terms of income expectations among those who have obtained high level of education in Italy, and if this mismatch between expected and effective incomes negatively affects their perception of happiness. We adopt a reference-dependent preferences model combined with the concept of “illusory superiority bias” to analyse data on “happiness” in Italy, provided by the biennial survey conducted by the Bank of Italy on the Italian households’ incomes and wealth between 2004 and 2014. Our results show a positive effect produced by education on incomes. High educated workers have on average higher income than other people, and this difference is statistically significant controlling for working experience and other possible confounding factors. However, the disutility resulting from the frustration of expectations produces negative effects on perceived happiness. Even though highly educated people are actually able to find better job matching in comparison to less educated workers, they are also more likely to seeing their income expectations frustrated.

Reference-dependent preferences have been well accepted in decision sciences, experimental economics, behavioral finance, and marketing. However, we still know very little about how decision makers form and update their reference points given a sequence of information. Our paper provides some novel experiments in a financial context to advance the understanding of reference-point formation over time. Our subjects' reference price is best described as a combination of the first and the last price of the time series, with intermediate prices receiving smaller and nondecaying weights. Hence, reference prices are not recursive. We provide a parsimonious formula to predict the reference points, which we test out-of-sample. The fit of the model is reasonably good. This paper was accepted by George Wu, decision analysis.

The mere preannouncement of a new product can affect consumer choice, thus complicating preannouncement strategy. This is because a preannounced product that is unavailable immediately can still be one of the alternatives in a consumer’s mind at the time of choice. Such unavailable products, also known as phantom products, influence the reference point that consumers compare alternatives to when making a choice, as has been widely demonstrated in experimental studies. Thus, in addition to encouraging consumers to postpone purchase in favor of a future product, preannouncement also changes their preference for the currently available products when consumers do not prefer to postpone. In this paper we explore preannouncement strategy by analyzing a model that incorporates the effect of new product preannouncement (NPP) on consumer preferences and compare the results with a benchmark case in which consumer preferences across the existing products are not influenced by preannouncement. We find that when we take into account the effect of NPP on consumer preferences across the existing products, although postponement of purchase by some consumers remains beneficial, the preference for the current product offering with a lower quality can suffer so much that the significant lowering of current profits is not offset by future gains. Thus, preannouncement may no longer be the optimal strategy for the firm with a lower-quality product, which in turn explains the “Osborne effect.” Our results also challenge the conventional wisdom in new product preannouncement literature. This paper was accepted by Juanjuan Zhang, marketing.

The aim of this paper is to test the effectiveness of wage-irrelevant goal-setting policies in a laboratory environment. In our design, managers can assign a goal to their workers by setting a certain level of performance on the work task. We establish our theoretical conjectures by developing a model in which assigned goals act as reference points to workers’ intrinsic motivation. Consistent with our model, we find that managers set goals that are challenging but attainable for a worker of average ability. Workers respond to these goals by increasing effort and performance and by decreasing on-the-job leisure activities with respect to the no-goal-setting baseline. Finally, we study the interaction between goal setting and monetary rewards and find, in line with our theoretical model, that goal setting is most effective when monetary incentives are strong. These results suggest that goal setting may produce intrinsic motivation and increase workers’ performance beyond what is achieved by using solely monetary incentives. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2068 . This paper was accepted by Uri Gneezy, behavioral economics .

People often use price as a proxy for quality, resulting in a positive correlation between prices and product liking, known as the \"price–quality\" (P–Q) heuristic. Using data from three experiments conducted at a winery, this article offers a more complex and complete referencedependent model of the relationship between price and quality. The authors propose that higher prices set higher expectations, which serve as reference points. When expectations are met or exceeded, we observe the familiar P–Q relationship. However, when price is high and quality is relatively low, the product falls short of consumers' reference point and the P–Q relationship is reversed; thus, people evaluate a lowquality product with a high price more negatively than a low-quality product with a low price. Using the results of a field experiment, the authors discuss implications for pricing considerations and profitability.

This study aims to analyze fans’ demand for live football matches in the German 2. Bundesliga, focusing on match-outcome uncertainty. To examine the decision to attend sporting events, a fixed effects regression and the Tobit model were used to test the uncertainty of game outcomes and reference-dependent preferences with loss aversion. The estimated fans’ demand for attending live football matches is represented by the logged attendance of 2,442 matches from the 2010/2011 to the 2017/2018 seasons of the 2. Bundesliga. Our findings indicate that fans prefer certain game outcomes over uncertain ones. In other words, reference-dependent preferences with loss aversion dominate the desire for close competition. We estimated our main model using various proxies of uncertainty as robustness checks, and the results confirmed our findings.