Loss averse customers and price inflexibility

A neoclassical model of monopoly is extended to incorporate the influence of customers' disposition toward a firm. Customer's disposition - captured by a variable called 'disenchantment' - and price are the determinants of a firm's demand. Disenchantment is positively related to the difference between the price the firm sets and the customers' 'reference price'. It is demonstrated that when customers are loss averse, the profit maximising price is rigid in the face of demand and cost shocks.

[This chapter is a direct republication of Sibly, H. Loss averse customers and price inflexibility, Journal of Economic Psychology, 23 (4) pp 521-538.]