Service And Price Competition With Consumer Loss Aversion: The Role Of Reference Points

The traditional operation management’ study object always based on the total requirement in the past, ignoring the individual decisions of consumers. Recently, with the rise of operation management and marketing research, scholars have gradually introduces consumer behavior in operations management, the exploration of explore consumer’s individual behavior affect enterprise competition has theoretical significance and practical value.Notice consumer usually compare goods based on the benchmark price or quality, and show loss aversion when consumer choose goods. Further found that under different market structure, the formation of the reference price and quality is not the same, which affect consumers’ purchase decision, called loss aversion behavior under reference dependence. This article is to study how the different reference point setting influence consumer loss aversion, and how to affect the price of duopoly firms competitive environment and the quality of decisions under different market structures. Setting up mathematic model respectively, complement with numerical analysis, mainly studied two aspects of content as following:(1) The asymmetric competition on market competition environment, when the reference price and quality is determined by only one firm called prominent firm. Consumers will perform loss aversion facing the products of her competitor. Study find that when the marginal quality cost is symmetrical, there are multiple equilibrium solutions on the market; when the marginal quality costs is asymmetric, there will be different equilibrium solution under different market. Otherwise, when the industry marginal quality cost is the same, neither firm can get competition advantage from loss aversion; when the industry marginal quality cost is high,prominent firm can get competition advantage from loss aversion; when the industry marginal quality cost is low, the competition is complicated.(2)The symmetric competition on market competition environment,The reference price and reference quality is determined by the two firms together. Then consumers will perform loss aversion evaluating both products of firms, thus add an extra psychological utility, then we can study the effect to duopoly competition of consumer loss aversion behavior. Specifically, we study under different setting of reference point, as well as different setting of cost, the effect of loss aversion to both firms. We find that, when the industry marginal cost is asymmetric, low-cost firm can gain competition advantage from loss aversion; when the industry marginal quality cost is symmetric, under average reference point, consumer loss aversion can hurt less than best option reference point.The study shows that consumer loss aversion will reduce both firms’ profit. However, some firm can gain competition advantage under certain setting of cost. Under asymmetric competition environment, low-cost firm can gain competition advantage all the time; while under symmetric competition environment, prominent firm can get competition advantage no matter whether his cost is lower than his rival when industry marginal quality cost is high.