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Advertising and attachment: exploiting loss aversion through prepurchase information
Author(s) -
Karle Heiko,
Schumacher Heiner
Publication year - 2017
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12208
Subject(s) - advertising , loss aversion , informative advertising , product (mathematics) , ex ante , value (mathematics) , point (geometry) , verifiable secret sharing , business , microeconomics , complete information , economics , online advertising , computer science , native advertising , the internet , set (abstract data type) , geometry , mathematics , machine learning , world wide web , programming language , macroeconomics
We analyze a monopolist's optimal advertising strategy when consumers are expectation‐based loss‐averse and uncertain about their individual match value with the product. Advertising provides verifiable match value information. It modifies the consumers' reference point and hence their willingness to pay for the product. We show that the optimal advertising strategy pools different consumer types so that some consumers engage in ex ante unfavorable trade. Incomplete informative advertising thus has a persuasive effect. This provides a rationale for policies that force the monopolist to disclose important product characteristics, not only at the point of sale, but also in all promotional materials.