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Ambiguity aversion and the power of established brands

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  • A. V. Muthukrishnan

    (Hong Kong University of Science and Technology)

  • Luc Wathieu

    (ESMT European School of Management and Technology)

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    Abstract

    This paper investigates situations where a sizeable sub-set of consumers prefer an inferior (dominated) offer made by an established brand to a superior (dominating) offer made by a less-established brand. Established brands are those for which consumers hold more confident beliefs concerning overall quality. Through a series of eight experiments, we test the hypothesis that the preference for a dominated established brand is linked to ambiguity aversion, a seemingly unrelated pattern of choice behavior between monetary gambles. We first show a correlation between ambiguity aversion and the preference for dominated established brands. We then demonstrate that the preference for established brands is enhanced when ambiguity aversion is made more salient in unrelated preceding choices. To further study the ambiguity-reducing properties of established brands, the last experiments assign brand names to monetary gambles, and it appears that (a priori unrelated) established brand names increase the likelihood of choosing ambiguous gambles. Overall, this research argues that brand equity for longstanding brands derives (at least in part) from consumers' tendency to avoid ambiguity.

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    Bibliographic Info

    Paper provided by ESMT European School of Management and Technology in its series ESMT Research Working Papers with number ESMT-07-005.

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    Length: 27 pages
    Date of creation: 29 Nov 2007
    Date of revision:
    Publication status: Published in Management Science 55(12): 1993-1941.
    Handle: RePEc:esm:wpaper:esmt-07-005

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    Related research

    Keywords: branding; brand choice; consumer behavior; decision making under uncertainty;

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    1. Heath, Chip & Tversky, Amos, 1991. " Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 5-28, January.
    2. Kahn, Barbara E & Sarin, Rakesh K, 1988. " Modeling Ambiguity in Decisions under Uncertainty," Journal of Consumer Research, University of Chicago Press, vol. 15(2), pages 265-72, September.
    3. Yoram Halevy, 2007. "Ellsberg Revisited: An Experimental Study," Econometrica, Econometric Society, vol. 75(2), pages 503-536, 03.
    4. Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
    5. Fox, Craig R & Tversky, Amos, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 585-603, August.
    6. Sherman, Roger, 1974. "The Psychological Difference Between Ambiguity and Risk," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 166-69, February.
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