Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278183 
Year of Publication: 
2022
Series/Report no.: 
WWZ Working Paper No. 2022/06
Publisher: 
University of Basel, Center of Business and Economics (WWZ), 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.
Subjects: 
Product lotteries
Probabilistic selling
Reference-dependent preferences
Loss aversion
JEL: 
D42
D81
D91
L12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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