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Abstract

The Spence model [Spence, A.M., 1975. Monopoly, quality and regulation. Bell Journal of Economics 417–429] is extended so that customers’ utility depends on their disposition toward the firm in addition to quantity and quality of the good consumed. Disposition is determined by customers’ ‘reference-dependent’ perception of firm's pricing and quality decisions. The profit maximising and efficient price and quality combinations are derived under the assumption that customers exhibit loss aversion with respect to the reference price and quality level. It is shown that adjustment to a change in economic conditions may call for price rigidity, quality rigidity or both depending on the level of the reference price and quality.

Item Type:	Article
Authors/Creators:	Sibly, H
Keywords:	Loss aversion; Price rigidity; Quality rigidity
Journal or Publication Title:	Journal of Socio-Economics
Publisher:	Elsevier Inc
ISSN:	1053-5357
DOI / ID Number:	https://doi.org/10.1016/j.socec.2007.01.010
Additional Information:	The definitive version is available at http://www.sciencedirect.com
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