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November 2023
[Marketing] Zhang Xing - Sunk Cost Effect, Self-control, and Contract Design
by Zhang Xing
SKK GSB Professor Xing Zhang, with co-authors from China, Singapore, and the US, has published a paper titled “Sunk Cost Effect, Self-control, and Contract Design,” in the Journal of Marketing Research, a premier marketing journal
Abstract
Consumers often fall prey to the sunk cost fallacy, a canonical mistake in decision-making, when decisions are influenced by an irreversible (sunk) cost that has already been incurred. Prof.Zhang's paper uses the game theory to analyze the role of the sunk cost effect as a self-commitment device in counteracting self-control problems. Companies can leverage the sunk cost fallacy when designing pricing contracts: the upfront payment, often seen as a sunk cost, can serve as a powerful commitment device for consumers increasing their future engagement with service and maximizing companies' profits.
Abstract
Consumers often fall prey to the sunk cost fallacy, a canonical mistake in decision-making, when decisions are influenced by an irreversible (sunk) cost that has already been incurred. Prof.Zhang's paper uses the game theory to analyze the role of the sunk cost effect as a self-commitment device in counteracting self-control problems. Companies can leverage the sunk cost fallacy when designing pricing contracts: the upfront payment, often seen as a sunk cost, can serve as a powerful commitment device for consumers increasing their future engagement with service and maximizing companies' profits.
Keywords
marketers, managers, economics, consumer psychology, pricing strategy
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