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Creating Attachment through Advertising: Loss Aversion and Pre–Purchase Information

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Abstract

Complementing the existing literature on anchoring effects and loss aversion, we analyze how firms can influence loss–averse consumers’ willingness to pay by product information in the form of informative advertising rather than by prices. We find that consumers’ willingness to pay is greatest when only partial information about the product—i.e. only a fraction of product attributes—is disclosed, and that partial information disclosure is the optimal mode of advertising for a monopolistic firm. This causes the consumers’ realized product valuation to diverge from their intrinsic product valuation, which leads to a reduction of consumer surplus. Consequently, transparency policies can help to protect consumers.

Suggested Citation

  • Heiko Karle, 2013. "Creating Attachment through Advertising: Loss Aversion and Pre–Purchase Information," CER-ETH Economics working paper series 13/177, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  • Handle: RePEc:eth:wpswif:13-177
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    File URL: http://www.cer.ethz.ch/content/dam/ethz/special-interest/mtec/cer-eth/cer-eth-dam/documents/working-papers/WP-13-177.pdf
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    Citations

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    Cited by:

    1. Heiko Karle & Georg Kirchsteiger & Martin Peitz, 2015. "Loss Aversion and Consumption Choice: Theory and Experimental Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 7(2), pages 101-120, May.
    2. Carbajal, Juan Carlos & Ely, Jeffrey C., 2016. "A model of price discrimination under loss aversion and state-contingent reference points," Theoretical Economics, Econometric Society, vol. 11(2), May.
    3. Antonio Rosato, 2016. "Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 709-733, August.
    4. Heiko Karle & Martin Peitz, 2014. "Competition under consumer loss aversion," RAND Journal of Economics, RAND Corporation, vol. 45(1), pages 1-31, March.
    5. Karle, Heiko & Peitz, Martin, 2017. "De-targeting: Advertising an assortment of products to loss-averse consumers," European Economic Review, Elsevier, vol. 95(C), pages 103-124.
    6. Herweg, Fabian & Karle, Heiko & Müller, Daniel, 2018. "Incomplete contracting, renegotiation, and expectation-based loss aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 176-201.
    7. Christina Aperjis & Filippo Balestrieri, 2017. "Loss aversion leading to advantageous selection," Journal of Risk and Uncertainty, Springer, vol. 55(2), pages 203-227, December.
    8. Michael Grubb, 2015. "Behavioral Consumers in Industrial Organization: An Overview," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 247-258, November.
    9. Michael D. Grubb, 2015. "Behavioral Consumers in Industrial Organization," Boston College Working Papers in Economics 879, Boston College Department of Economics.
    10. Dato, Simon & Müller, Daniel & Grunewald, Andreas, 2015. "Expectation-Based Loss Aversion and Strategic Interaction," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112947, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Advertising; Loss Aversion; Information Disclosure.;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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