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An experimental investigation
April 20, 2012. ACLE workshop on Behavioral Competition and Regulation Amsterdam
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A general debate
Behavioural economics shows that consumers have inconsistent, context-dependent preferences or not enough brainpower to evaluate and compare complicated products (Spiegler, Bounded rationality and Industrial Organisation, 2011) They do not behave according to the standard model of rational choice
Kahneman, Slovic and Tversky, Judgment under Uncertainty, 1982 Ariely, Predictably Irrational, 2008
This leads them to make choices that are not the best for themselves (or for others). Not only do they make bad choices, but those dont even make them happy! (Layard, Happiness, 2005)
= Our paper: What to do about rms that try to confuse consumers and exploit their irrational behavior?
Do Consumers Prefer Oers that are Easy to Compare? 4 / 23 Paolo Crosetto & Alexia Gaudeul
Adams Confusopoly
Confusopoly: A group of companies with similar products who intentionally confuse customers instead of competing on price (Scott Adams, The Dilbert Future, 1997).
Do Consumers Prefer Oers that are Easy to Compare? 5 / 23 Paolo Crosetto & Alexia Gaudeul
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There is an incentive for rms to adopt the same standard as their competitors Firms that have a common standard will compete more harshly and so will have lower prices Meaning that consumers who prefer common standards oers are better o. The belief that common standard oers are better is therefore self-fullling.
Experimental design
Figure: Screen shot of a menu with three oers and a common standard
Subjects must buy paint to repaint their room. They are faced with dierent oers. Subjects are not told the unit price, but only a price for the area the paint can cover. Oers that share a common standard are easier to compare
Do Consumers Prefer Oers that are Easy to Compare? 9 / 23 Paolo Crosetto & Alexia Gaudeul
Example 3-menu
The shape is quite obvious, but the area is not easily judged. Unit price is thus hidden. But comparing across the same standard is easier.
Do Consumers Prefer Oers that are Easy to Compare? 10 / 23 Paolo Crosetto & Alexia Gaudeul
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Four heuristics + 1
First
Common Standard
Signals
Second
Signals
Threshold
No Signals
Common Standard
No Common Standard
Rule
DE Dominance Editing
SF Signals First
Naive
The threshold heuristic consists in selecting the best rm among those with a common standards, then giving it a bonus when comparing it with other rms.
Do Consumers Prefer Oers that are Easy to Compare? 13 / 23 Paolo Crosetto & Alexia Gaudeul
Some remarks
More accurate consumers obtain higher payo, whatever the rule followed. The LPCS rule is not always best: accurate consumers are better o not following it. Threshold to be used is higher for less accurate consumers. Threshold heuristic performs best as long as one judges correctly ones accuracy in making choices...
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The experiment
Run in Jena at Max Planck laboratory, June 2011 202 subjects in 8 sessions. Subject faced 80 menus, varying in diculty and length. Half of the menus had a common standard. Subjects also faced a number of control tasks (mathematical operations, consumer problems, shape comparisons).
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Given such bad choices, consumers would do best to adopt a threshold rule applying a penalty of 20 to 40% to non standard oers.
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6-menu
* Dierence signicant vs. one row above. (*) Dierence signicant vs. two rows above.
Participants were aware of the presence of CS oers, eliminated dominated CS oers and thus generally obtained signicantly higher payos when a menu included a CS. 18 / 23 Do Consumers Prefer Oers that are Easy to Compare? Paolo Crosetto & Alexia Gaudeul
Subjects tend to prefer lower priced options, broader shapes, and smaller sized options Subjects favored the lower priced CS oers (vs. non standard) if the menu was particularly confusing (many choices, prices close together) They also favored that oer if CS oers were next to each other in 3 menus (but not in 6 menus...) But only women consistently favored common standard oers (the shopping gene?!?)
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6menus
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50
100
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200
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10
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100
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6-menu
Lower priced standard oers generated signicantly higher revenue than other oers. A rm would thus benet from adopting a CS and undercutting its direct rival.
Do Consumers Prefer Oers that are Easy to Compare? 22 / 23 Paolo Crosetto & Alexia Gaudeul
Summing up
The experiment allowed us to quantify consumer preferences for common standard oers.
A minority prefer CS oer, but suciently strongly that this translates in a preference for CS oers at the aggregate level. A minoritys preference for a CS does not therefore get diluted by the less rational behavior of the rest.
Given such preferences, a rm would benet from adopting a common standard. Furthermore, consumers who favored common standard oers gained higher payos than others. The conditions are therefore in place for a process of convergence to a common standard.