Gacha game: when prospect theory meets optimal pricing

Gan, Tan ORCID: 0000-0002-9483-7869 (2023) Gacha game: when prospect theory meets optimal pricing. . Social Science Research Network (SSRN).

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Abstract

I study the optimal pricing process for selling a unit good to a buyer with prospect theory preferences. In the presence of probability weighting, the buyer is dynamically inconsistent and can be either sophisticated or naive about her own inconsistency. If the buyer is naive, the uniquely optimal mechanism is to sell a “loot box” that delivers the good with some constant probability in each period. In contrast, if the buyer is sophisticated, the uniquely optimal mechanism introduces worst-case insurance: after successive failures in obtaining the good from all previous loot boxes, the buyer can purchase the good at full price.

Item Type:	Monograph (Working Paper)
Divisions:	LSE
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	D - Microeconomics > D4 - Market Structure and Pricing > D40 - General D - Microeconomics > D4 - Market Structure and Pricing > D42 - Monopoly D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty D - Microeconomics > D9 - Intertemporal Choice and Growth > D90 - General
Date Deposited:	19 Sep 2024 11:39
Last Modified:	02 Oct 2024 23:18
URI:	http://eprints.lse.ac.uk/id/eprint/125466

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