Economic Theory and Experimental Seminar - Heiko Karle (Frankfurt School of Finance and Management)

Room 605, Level 6, 111 Barry Street, Carlton

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Alex Nichifor

nichifor@unimelb.edu.au

T: +61 3 8344 7420

Title: Consumer Search and the Uncertainty Effect (joint with Heiner Schumacher)

Abstract:  We consider a model of Bertrand competition where consumers are uncertain about the value of the firms’ products. Consumers are expectation-based loss-averse and can inspect all products at zero cost. A loss-averse consumer may prefer a certain option to inspecting and choosing an uncertain alternative even if the worst realization of the uncertain alternative is better than the certain option. The firms’ strategic behavior can exacerbate the scope for this “uncertainty effect.” Thus, consumers with modest degrees of loss-aversion (λ < 2) may make first-order stochastically dominated choices, and firms selling inferior products may make positive profits despite Bertrand competition.