Loss aversion and the uniform pricing puzzle for media and entertainment products

The uniform pricing puzzle for vertically differentiated media and entertainment products (movies, books, music, mobile apps, etc.) is that a firm with market power sells high- and low-quality products at the same price even though quality is perfectly observable and price adjustments are not costly. We resolve this puzzle by assuming that consumers have an uncertain taste for quality and accounting for consumer loss aversion in monetary and consumption utilities. The novelty of our approach is that the so-called reference transaction is endogenously set as part of a “personal equilibrium” and is based only on past purchases of same-quality products.

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