Ambiguity aversion and the power of established brands
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.
|Date of creation:||29 Nov 2007|
|Publication status:||Published in Management Science 55(12): 1993-1941.|
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- 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.
- Kahn, Barbara E & Sarin, Rakesh K, 1988. " Modeling Ambiguity in Decisions under Uncertainty," Journal of Consumer Research, Oxford University Press, vol. 15(2), pages 265-272, September.
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- Roger Sherman, 1974. "The Psychological Difference Between Ambiguity and Risk," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 166-169.
- Fox, Craig R. & Weber, Martin, 1999. "Ambiguity Aversion, Comparative Ignorance, and the Role of Context," Sonderforschungsbereich 504 Publications 99-47, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Halevy, Yoram, 2005.
"Ellsberg Revisited: an Experimental Study,"
Microeconomics.ca working papers
halevy-05-07-26-11-51-13, Vancouver School of Economics, revised 25 Feb 2014.
- Craig R. Fox & Amos Tversky, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 585-603.
- Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 643-669.
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