DO CONSUMERS PREFER OFFERS THAT ARE EASY TO COMPARE?

1. Consumers make bad choices

Some decision problems are hard to process People are subject to biases and errors Kahneman, Slovic and Tversky, Judgment under Uncertainty: Heuristics and Biases, 1982 So bad choices are often made: Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions , 2008 Reaction by Robert Sugden: Let consumers make their own decisions!
The Opportunity Criterion: Consumer Sovereignty Without the Assumption of Coherent Preferences, 2004 Why incoherent preferences do not justify paternalism, 2008.

2. What to do about it?

Nudge them or Frame their choices: Soft Paternalism
Thaler & Sunstein, Nudge, Improving Decisions About Health, Wealth, and Happiness, 2008

3. An illustration: Should firms be allowed to confuse consumers?

Confusopoly
A group of companies with similar products who intentionally confuse customers instead of competing on price Scott Adams, The Dilbert Future, 1997

Encourage them to do things that will make them happy (ex-post!)

Richard Layard, Happiness: Lessons from a new science, 2005.

Results of bad choices are often also bad for society Eating choices: Obesity Health costs Financial choices: Over-indebtedness Bailouts Transportation: Neglect fuel costs Global warming

Furthermore, Mother/The Expert does not (always) know best.

David H. Freedman, Wrong: Why Experts Keep Failing Us, 2010)

Gaudeul A. and R. Sugden (2009), Spurious If consumers prefer to choose among offers sharing the same standard then this leads to a Common Standard Complexity and Common equilibrium, where products are easy to compare. Standards in Markets for Problem: Do consumers really prefer common Consumer Goods, standards? Which shortlisting heuristic do they use? forthcoming Economica.

4. The experimental setting

Two criteria for choosing between products:
Based on imperfect observation of unit prices (signals) Based on whether the product belongs to a Common Standard

5. A choice of heuristics

6. How do heuristics perform? (in theory!)

Prices are directly comparable within a standard

Choice among common standard will be accurate

Four basic heuristics + The threshold heuristic The threshold heuristic consists in selecting the best firm among those with a common standards, then giving it a bonus when comparing it with other firms. Bonus = 0 is dominance editing Bonus is the common standard heuristic
If consumers make no mistakes, Naive is best (signals are accurate) and If consumers make huge mistakes, Naive is Common Standard rule is worst worst (random) and Common Standard Rule is best

7. Consumers Make Mistakes. Common Standards Help.

Consumers make relatively bad choices Consumers make more mistakes when choosing among 6 rather than 3 options Payoffs are higher in menus with a Common Standard The lowest priced of the firms with a common standard makes higher profits than others
Overall, only 39% of choices are of the best option In 59 out of 80 tasks, the majority of the subjects choose less than optimally Following the Common Standard Rule would increase their payoffs

8. What heuristics do consumers use?

Overall, for a given price, the Lowest Priced Common Standard is more likely to be chosen than other alternatives.
But that does not tell us what heuristic consumers use
Offer 1 Unit price 2.1 A 0 p1 0 0 0 0 Offer 2 2 A 1 p2 1 p2+ p1+p2 p2* Offer 3 1.9 B 0 p3 0 p3p3 p3*

9. The road ahead What would firms do?

We proved the first part of the reasoning in Gaudeul & Sugden 2009
Consumers prefer common standards

To the point where they obtain lower payoffs when choosing among more options!

Standard Consumer choice Naive rule

Menus without common standard are used to predict what choice the consumer would make under one of the various heuristics
For the threshold rule, the choice is predicted for the whole range of different bonuses the consumer might give the lower priced common standard

Everything else equal, consumers obtain higher payoffs when offered a menu with a common standard compared to a menu without.

Common standard rule Threshold heuristic Signal first rule

The consumer is then assigned to the rule that best predicts its choice (Maximum Likelihood)
Among CS, consumers do tend to choose the lower priced (!) Only about 15% favour the lower priced of the common standard offers About 30% use the signal first rule and about 30% use the dominance editing rule The rest behave as if there was no common standard.

This means that *in theory* firms ought to adopt common standards
Would this hold in practice? We will simulate the consumer side based on this experiment We will get subjects to play the role of firms Will firms coordinate on a common standard, and if so, how and under what condition?

There is therefore an incentive for firms to adopt the standard of others

Dominance editing rule

Overall, as long as the price of the LPCS is no more than 8% higher than that of the firm without a CS, it is still chosen

PAOLO CROSETTO AND ALEXIA GAUDEUL MPI AND GSBC, JENA