In the face of rising costs, some firms reduce the quality of the goods they produce rather than maintain quality and increase prices. How would behavioral economics explain this strategy?

Question

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People have a loss aversion bias, meaning they strongly prefer avoiding losses to acquiring equivalent gains. A price increase is perceived directly and immediately as a loss (paying more), whereas a reduction in quality is less immediately noticeable and may not be perceived as a loss until later, if at all. This makes reducing quality a more palatable option for firms trying to avoid the negative consumer reaction that often accompanies price increases.

In the Face of Rising Costs, Some Firms Reduce the Quality