Using Extremeness Aversion to Fight Obesity: Policy Implications of Context Dependent Demand

Abstract

This article illustrates how the compromise effect alters consumers' selection of soft drinks. Using three within-subject studies, we show that extremeness aversion and price insensitivity cause consumers to increase their consumption when the smallest drink size is dropped or when a larger drink size is added to a set. As a result rational firms find it best to drop the smaller sizes and add a larger size, thus increasing overall consumption. After estimating each individual's demand as a function of price and drink size availability, policy experiments demonstrate how it is possible to reduce soft drink consumption without additional taxation.