Product Lotteries and Loss Aversion

Sebastian Schäfers ()
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Sebastian Schäfers: University of Basel

Working papers from Faculty of Business and Economics - University of Basel

Abstract: Product lotteries are a sales strategy where companies hide features of differentiated products from consumers until the purchase is complete. I identify loss aversion as an important factor explaining the existence of vertical product lotteries. I consider a profit-maximizing monopolist serving loss-averse consumers with rational expectations about the lottery. I find that the optimal strategy consists of offering a premium product with high and deterministic quality and a lottery with stochastic and lower expected quality. When consumers are reasonably loss averse, I show that the profit increase from adding a quality lottery exceeds 10% compared to the case without a lottery.

Keywords: Product lotteries; Probabilistic selling; Reference-dependent preferences; Loss aversion (search for similar items in EconPapers)
JEL-codes: D42 D81 D91 L12 (search for similar items in EconPapers)
Date: 2022-08-22
New Economics Papers: this item is included in nep-cbe, nep-com, nep-ind and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:bsl:wpaper:2022/06

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