Creating Attachment Through Advertising: Loss Aversion and Pre-Purchase Information

CER-ETH – Center of Economic Research at ETH Zurich Working Paper No. 13/177

50 Pages Posted: 29 Mar 2013

See all articles by Heiko Karle

Heiko Karle

Frankfurt School of Finance & Management; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: March 22, 2013

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.

Keywords: Advertising, Loss Aversion, Information Disclosure

JEL Classification: D83, L41, M37

Suggested Citation

Karle, Heiko, Creating Attachment Through Advertising: Loss Aversion and Pre-Purchase Information (March 22, 2013). CER-ETH – Center of Economic Research at ETH Zurich Working Paper No. 13/177, Available at SSRN: https://ssrn.com/abstract=2240367 or http://dx.doi.org/10.2139/ssrn.2240367

Heiko Karle (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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