Buy It Now or Later, or Not: Loss Aversion in Advance Purchasing

TL;DR

This paper explores how loss-averse consumer preferences with reference updating influence advance purchasing decisions and reveals that sellers tend to commit to spot prices even without contractual obligations.

Contribution

It introduces a novel model incorporating belief-based loss aversion with reference updating and analyzes its impact on consumer and seller behaviors in advance-purchase settings.

Findings

Loss aversion increases willingness to pre-purchase.

Sellers tend to commit to spot prices voluntarily.

The model provides new insights into consumer-seller interactions.

Abstract

This paper studies the advance-purchase game when a consumer has belief-based loss-averse preferences, introducing a novel perspective by incorporating reference updating. It demonstrates that loss aversion increases the consumer's willingness to pre-purchase. Moreover, the paper endogenizes the seller's price-commitment behavior in the advance-purchase problem. The analysis reveals that the seller will commit to his spot price even with no obligation to do so, a behavior previously assumed in the literature.