.png){kind=icon}
.png){kind=icon}
Return
Consumer-Driven Class Pricing
.png){kind=icon}
PRE
AI
DOI：10.1287/mksc.2023.0133.png)
.png){kind=icon}
Original request for help.png){kind=icon}
Share.png){kind=icon}
Save
Abstract
En 中文
Class pricing describes a widespread practice of assigning a few price points to a large set of differentiated products. Although previous literature proposes firms' costly price setting activities as a friction-based explanation, I offer a consumer-driven rationale rooted in reference-dependent and loss-averse consumer behaviors. I develop a model incorporating a monopolistic firm selling multiple products to a continuum of consumers with heterogeneous tastes and employ the expectations-based prospect theory proposed by Koszegi and Rabin to depict customers' reference points as endogenously determined via aligning their optimal choices to their rational expectations about consumption outcomes. I find that although product cost variations motivate unequal prices to stimulate demand for lower-cost products, loss aversion constrains this practice; the resulting demand shift asymmetrically diminishes consumers' willingness to pay (WTP) for lower-cost products more significantly than it can elevate WTP for higher-cost alternatives. This asymmetry reduces the firm's total profit from multiple products and drives the adoption of class pricing. My research contributes to a better understanding of class pricing for both academic and managerial practice, and it provides insights on when more prices are not necessarily advantageous in an era of information and emerging artificial intelligence technologies.
Keywords:
class prices
expectations-based prospect theory
endogenous reference points
loss aversion
