The role of emotions in consumption choices: the case of anticipated regret with boundedly rational agents

The mere act of choosing implies giving up possible alternatives and is therefore likely to generate a feeling of regret, which agents anticipate at the decision stage. In line with regret theory, I study the impact of anticipated regret on the decisionmaking process. The key feature of the model consists in considering biased regret anticipations. I thus describe the combined effect of cognitive biases and anticipated regret on consumer choice and on the market outcome. I show that in a Hotellingtype vertically differentiated duopoly, inaccurate regret anticipations lead to a price distortion and ultimately to a drop in consumer welfare. Moreover, in a vertically differentiated duopoly, firms do not have incentives to spontaneously educate consumers. This finding makes a strong argument in favor of a legal intervention to counter the negative effects of consumer biases.