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Risk-neutral firms can extract unbounded profits from consumers with prospect theory preferences

Azevedo, Eduardo M. and Gottlieb, Daniel (2012) Risk-neutral firms can extract unbounded profits from consumers with prospect theory preferences. Journal of Economic Theory, 147 (3). 1291 - 1299. ISSN 0022-0531

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Identification Number: 10.1016/j.jet.2012.01.002

Abstract

This paper considers the problem of a risk-neutral firm offering a gamble to consumers with preferences given by prospect theory. Under conditions satisfied by virtually all functional forms used in the literature, firms can extract arbitrarily high expected values from consumers. Moreover, for any given lottery, there exists another lottery that makes both the firm and the consumer better off. As a consequence, equilibria and Pareto optimal allocations do not exist in standard monopolistic or competitive models.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-e...
Additional Information: © 2012 Elsevier Inc
Divisions: Management
Subjects: H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
Date Deposited: 13 Nov 2019 15:36
Last Modified: 20 Nov 2019 12:48
URI: http://eprints.lse.ac.uk/id/eprint/102525

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