Loss Aversion for Quality in Consumer Choice

Abstract

A reference price is an internal price that consumers are believed to use to compare actual prices. Reference effects for price have been demonstrated in many settings. Reference effects for quality also have been demonstrated using scanner data. Here we present experimental evidence. Firstly, it is shown that high quality goods will be valued more by consumers who consider trading down in quality than by those who consider trading up in quality. Secondly, we show that when all prices fall, more switching up in quality from the reference brand will occur than switching down in quality when all prices rise, and that when all prices fall, consumers will switch to higher quality up to, but not beyond, the price regularly paid.

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