Creating attachment through advertising: Loss aversion and pre-purchase information

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.