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Envy and pricing of quality in adverse selection

Kangsik Choi
Journal of Economics
Vol. 106, No. 1 (May 2012), pp. 27-43
Published by: Springer
Stable URL: http://www.jstor.org/stable/43575150
Page Count: 17
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Envy and pricing of quality in adverse selection
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Abstract

The paper analyzes the optimal pricing of quality when consumers feel envious of other purchase deals. The influence of envy on the optimal pricing of quality varies depending on whether consumers are concerned about envy in payments or in rents. If consumers compare their payments with those of other consumers, the firm has an incentive to produce lower quality than the first-best level for the high valuation consumer and higher quality than the second-best level for the low valuation consumer. Conversely, when consumers' disutility from envy arises from envy in rents, the trade-off between efficiency and rent extraction becomes more serious than in the situation where there is no envy.

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