Small Gains Or Smaller Losses: Optimal Price Promotions and the Silver Lining Effect

Peter Jarnebrant, Columbia University Graduate School of Business, USA
Eric Johnson, Columbia University Graduate School of Business, USA
Olivier Toubia, Columbia University Graduate School of Business, USA
The silver lining effect predicts that segregating a small gain from a larger loss results in greater psychological value than does integrating them into a smaller loss. Starting from the prospect theory value function, we derive conditions under which this effect should occur; the optimality of integration depends on the size of the gain and the loss, as well as the individual’s degree of loss aversion and rate of diminishing sensitivity. Some of the predictions are tested and confirmed in an online consumer purchase setting where integration and segregation are operationalized as discounts and rebates, respectively.
[ to cite ]:
Peter Jarnebrant, Eric Johnson, and Olivier Toubia (2007) ,"Small Gains Or Smaller Losses: Optimal Price Promotions and the Silver Lining Effect", in NA - Advances in Consumer Research Volume 34, eds. Gavan Fitzsimons and Vicki Morwitz, Duluth, MN : Association for Consumer Research, Pages: 18.