Is Status Quo Bias Consistent with Downward-sloping Demand?

By now, there is a large experimental literature showing some kind of status quo bias. If the subject is given a coffee mug (candy bar) and later given the possibility of trading it for a candy bar (coffee mug) of equal value, the subject is likely to stick with the original allocation (Knetsch, 1989). Here, we ask whether status quo bias can be made consistent with downward-sloping demand curves. This paper thus differs in intent from a large body of research that incorporates a different notion of status quo bias into a more general formulation of revealed preference (e.g., Masatlioglu and Ok, 2005; Sagi, 2006); such research demonstrates that there are different sets of primitives that lead to different axioms of revealed preference. In this paper, we do not care which set of primitives holds or whether such results can be incorporated into the neoclassical model of consumer behavior (as Munro and Sugden, 2003, have done). Instead, we undertake a strict behavioralist approach: Individuals display status quo bias and downward-sloping demand curves. Whether such behavior can be derived from a consistent set of assumptions is irrelevant to our purpose. Indeed, we do not require the existence of a preference relation that rationalizes choices at all—all that is required is choice behavior. What we want to find out is the implications of such observed behavior; in particular, we want to determine whether status quo bias and downward-sloping demand curves are consistent with each other. The short answer is yes, but the consumer will display addictive behavior. The remainder of the paper will be devoted to demonstrating this result. We will make the following set of assumptions: