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Price Salience and Product Choice
Abstract
We analyze a large-scale field experiment on StubHub.com and show that disclosing fees upfront reduces both the quantity and quality of purchases.
... Unsurprisingly, there is evidence that dark patterns harm an individual's autonomy [10] as they trick users into deciding against their preferences, denying their choice, or making their choice more difficult. In addition, they harm consumers' welfare by generating a financial loss [25]. Dark patterns also create significant privacy harms as they lead users to share more personal data than intended. ...
... Indeed, user manipulation can take different forms and the first challenge to fight dark patterns is to be able to detect them. Many articles proposed classifications of dark patterns in various fields [2, 4-7, 13-15, 49-50], while regulators, agencies or institutions such as the European Commission, the Federal Trade Commission, the Competition & Market Authority and the OECD [9,13,15,16,[17][18][19][20][21][22][23][24][25][26][27][28] also proposed their own classifications, partially building on scholarship. These taxonomies are all different, either in their focus area, in the number of categories, or in the level of details; but they all aim at mapping existing dark pattern techniques and identifying the different ways to deceive or manipulate users. ...
... We can distinguish four major areas in the existing taxonomies: researchers in privacy [4,[7][8]50], user Experience design [2], computer sciences [5-6, 10, 46], regulators or consumer protection bodies [9,13,15,16,[17][18][19][20][21][22][23][24][25][26][27][28]. ...
Dark patterns are deceptive or manipulative interfaces that can lead users to act against their preferences or best interests. They are widely spread in the digital environment and there is multidisciplinary evidence of the individual and structural harms that they cause. In this article, we synthesize evidence of the prevalence of dark patterns, evidence of their harms, and the legal framework addressing them. Then, we propose a complementary area of research: a new taxonomy to contribute to solving the issue. We detail existing taxonomies, their main respective purposes, and we provide a gap analysis bridging human-centered principles and practitioners needs. Based on that analysis, we propose a new taxonomy to provide a usable, accessible, and sustainable tool to empower all stakeholders to take action and fight against dark patterns. In this taxonomy, we introduce the notion of fair pattern as a way to shift from a problem-oriented to a problem-solving perspective. Finally, the advantages and limitations of this taxonomy, such as the perspectives it opens as a countermeasure to solve the issue, are discussed.
... For online retailers, deliberately increasing search frictions by placing obstacles in website navigation encourages additional product search, with visitors spending more time exploring, which could improve online retailers' margins and conversions (Ngwe, Ferreira, and Teixeira 2019). Similarly, Blake et al. (2021) find that disclosing mandatory fees later in the purchase funnel leads to more purchases, and consumers tend to buy more expensive products compared to an environment where fees are disclosed upfront. This practice of fee obfuscating induces consumers to search more often and revisit other product listings. ...
... Consequently, they may have included more expensive products in their consideration set than those in the dual cue condition. The result is similar to the finding that consumers buy more expensive products when mandatory fees are hidden until the checkout page (Blake et al. 2021). In the dual cue condition, consumers tend to view price more as a financial sacrifice and less as a quality signal (Noone and McGuire 2014). ...
... In the US setting of Reiss and White (2005), prices are adjusted monthly and are non-linear in terms of the quantity consumed, while in Switzerland, they are adjusted yearly and are linear in terms of the quantity consumed. The more frequent price adjustment and the non-linear variation can generate more price salience for US households, which, according to the literature on price salience, is likely to determine a greater response to price changes (Sexton, 2015;Blake et al., 2021). ...
An increasing number of households installing solar panels and consuming the energy thus produced raises two challenges for regulators: network financing and vertical equity. We propose alternative tariff and subsidy designs for policymakers to incentivise solar panel adoptions and guarantee that network costs are recovered, while trading off efficiency, equity, and welfare motives. We estimate a structural model of energy demand and solar panel adoption, using a unique matched dataset on energy consumption, prices, income, wealth, solar panel installations, and building characteristics for 165,000 households in Switzerland from 2008-2014. Our counterfactuals recommend the optimal solar panel installation cost subsidies and two-part energy tariffs to achieve a solar energy target. We show that, relative to installation cost subsidies, relying on marginal prices to incentivise solar panel adoptions is more cost efficient and progressive across the income distribution, but generates a larger aggregate welfare loss.
... some app developers have complained about the high commission fees on Apple's iOS ecosystem, 2 there are legislative efforts to push ride-sharing platforms to treat drivers as employees rather than as contractors, 3 and some delivery workers for grocery, restaurant food, and merchandise shopping reportedly feel squeezed by platform algorithms. 4 Many of these concerns also attribute the alleged harm to stakeholders to a lack of competition at the platform level, and these assertions have further triggered antitrust investigations and legislative efforts to regulate certain practices of platforms worldwide. ...
... 6 Equivalently, ticket taxes may be viewed through the lens of partitioned pricing as a type of "shrouded attribute" (Gabaix and Laibson 2006). To this point, FFAR also required airlines to provide more prominent links to information regarding baggage fees, which represent a clear example of partitioned pricing similar to cases considered elsewhere in the behavioral literature, such as printer ink cartridges (Gabaix and Laibson 2006), shipping costs (Hossain and Morgan 2006), or booking fees (Blake et al. 2017). Brueckner et al. (2013) examine the incentives for baggage fee unbundling and their resulting impacts on airline revenues, albeit without discussing the role of consumer inattention. ...
We examine the impact of a January 2012 enforcement action by the US Department of Transportation that required US air carriers and online travel agents to modify their web interfaces to incorporate all ticket taxes in up-front, advertised fares. We show that the more prominent display of tax-inclusive prices is associated with significant reductions in consumer tax incidence, demand, and ticket revenues along more heavily taxed itineraries. In particular, the fraction of unit taxes that airlines passed onto consumers fell by roughly 75 cents for every dollar of tax. These results present evidence of consumer inattention in a novel institutional setting featuring quasi-experimental variation in tax salience, economically significant tax amounts, and endogenous price responses. (JEL D91, H22, H25, H31, L84, L93)
... In the context of online shopping, Ellison and Ellison (2009) show that price obfuscation strategies, such as not showing the retail price in the search results, can yield higher equilibrium profits because they give more monopoly power to firms by increasing search frictions and making consumers less informed. Similarly, Blake et al. (2017) document that obfuscation of shipping and handling fees led to a revenue boost for StubHub.com. They show that part of this effect is due to higher search costs making comparisons across substitute products more difficult. ...
Personalized prices affect fairness concerns, and firms have incentive to invest in technology that obfuscates prices and mitigates consumers’ fairness concerns.
... Although the properties of the fragmented estimator and its bias have not been fully discussed in the existing literature, several authors have proposed approaches to alleviate the data fragmentation problem. These approaches include data linking (Abramitzky et al. 2019;see Bailey et al. 2017 for a review), experiment-based adjustments (Coey and Bailey, 2016;Koehler et al., 2016), missing data imputation (Novak et al., 2015), and aggregation at a less granular level (Rutz, Trusov and Bucklin, 2011;Blake et al., 2018). Our paper takes another step forward by comparing several prevalent solutions and proposing methods to improve the last approach. ...
Consumers interact with firms across multiple devices, browsers, and machines; these interactions are often recorded with different identifiers for the same individual. The failure to correctly match different identities leads to a fragmented view of exposures and behaviors. This paper studies the identity fragmentation bias, referring to the estimation bias resulted from using fragmented data. Using a formal framework, we decompose the contributing factors of the estimation bias caused by data fragmentation and discuss the direction of bias. Contrary to conventional wisdom, this bias cannot be signed or bounded under standard assumptions. Instead, upward biases and sign reversals can occur even in experimental settings. We then propose and compare several corrective measures, and demonstrate their performances using an empirical application.
... Using the ratio of the estimated effects of the enforced tax rate on booking price and nights booked, we calreservation using scraped data relies on inferring that back-to-back newly-booked nights are part of a single reservation unless AirDNA can distinguish multiple reservations from review data, which may introduce measurement error. When we estimate the extensive margin effect, we find a statistically insignificant negative effect on number of reservations that is roughly half the size of our preferred estimate of the effect on nights booked 32 Note that, if the tax is not fully salient, this calculation will tend to underestimate the true price elasticity of demand (Ellison and Ellison, 2009a;Blake et al., 2018). culate the lower bound of the price elasticity of supply to be supply = γ Q /γ P = −0.361 ...
Tax enforcement is especially costly when market participants are difficult to observe. The benefits of enforcement depend crucially on pre-enforcement compliance. We derive an upper bound on pre-enforcement compliance from the pass-through of newlyenforced taxes. Using data on Airbnb listings and the platform's voluntary collection agreements, we find that taxes are paid on, at most, 24 percent of Airbnb transactions prior to enforcement. We also find that demand for Airbnb listings is inelastic, driving three key insights: the tax burden falls disproportionately on renters, excess burden is small, and tax enforcement is relatively ineffective at reducing local Airbnb activity.
... In addition, sludge is used opportunistically by clever marketers who seek to give consumers the impression that they will receive an excellent deal but who know that consumers will not take advantage of the opportunity (Blake et al., 2018;Persson, 2018). In many cases, government officials are doing the same thing. ...
Consumers, employees, students and others are often subjected to ‘sludge’: excessive or unjustified frictions, such as paperwork burdens, that cost time or money; that may make life difficult to navigate; that may be frustrating, stigmatizing or humiliating; and that might end up depriving people of access to important goods, opportunities and services. Because of behavioral biases and cognitive scarcity, sludge can have much more harmful effects than private and public institutions anticipate. To protect consumers, investors, employees and others, firms and private and public institutions should regularly conduct Sludge Audits to catalogue the costs of sludge and to decide when and how to reduce it. Sludge often has costs far in excess of benefits, and it can hurt the most vulnerable members of society.
... 6 Equivalently, ticket taxes may be viewed through the lens of partitioned pricing as a type of "shrouded attribute" ( Gabaix and Laibson, 2006). To this point, FFAR also required airlines to provide more prominent links to information regarding baggage fees, which represent a clear example of partitioned pricing similar to cases considered elsewhere in the behavioral literature, such as printer ink cartridges ( Gabaix and Laibson, 2006), shipping costs (Hossain and Morgan, 2007), or booking fees ( Blake et al., 2017). Brueckner et al. (2013) examine the incentives for baggage fee unbundling and their resulting impacts on airline revenues, albeit without discussing the role of consumer inattention. ...
We examine the impact on air travelers of an enforcement action issued by the U.S. Department of Transportation in January 2012 that required U.S. air carriers and online travel agents to incorporate all mandatory taxes and fees into their advertised fares. Exploiting cross-itinerary ticket tax variation within international city market pairs, we provide evidence that the more prominent display of tax-inclusive prices is associated with a significant reduction in tax incidence on consumers and a decline in passenger volume along more heavily-taxed itineraries. Ticket revenues are commensurately reduced. These results suggest a pronounced degree of inattention to ticket taxes prior to the introduction of full-fare advertising and reinforces the theoretical predictions and experimental findings of the literature on tax salience in a quasi-experimental context where taxes average more than $100 per ticket and where firms may engage in price-setting behavior.
... Equivalently, ticket taxes may be viewed through the lens of partitioned pricing as a type of "shrouded attribute"(Gabaix and Laibson, 2006). To this point, FFAR also required airlines to provide more prominent links to information regarding baggage fees, which represent a clear example of partitioned pricing similar to cases considered elsewhere in the behavioral literature, such as printer ink cartridges(Gabaix and Laibson, 2006), shipping costs (Hossain and Morgan, 2007), or booking fees(Blake et al., 2017).Brueckner et al. (2013) examine the incentives for baggage fee unbundling and their resulting impacts on airline revenues, albeit without discussing the role of consumer inattention.Agarwal et al. (2014) provide a methodology for measuring the effects of fee disclosure on consumer welfare with an application to baggage fees. We are not able to assess empirically the effects of FFAR with respect to baggage fees due to lack of available data. ...
We examine the impact on air travelers of an enforcement action issued by the U.S. Department of Transportation (DOT) in 2012 requiring that domestic air carriers and online travel agents incorporate all mandatory taxes and fees in their advertised fares. Consistent with the literature on tax salience, we find quasi-experimental evidence that the more prominent display of tax-inclusive prices is associated with a reduction in tax incidence on consumers, and this effect varies non-monotonically with market concentration. Ticket revenues are commensurately reduced, while passenger demand and average per-passenger tax revenue between origin and destination airport-pairs likewise decline following the introduction of full-fare advertising.
Resumo: O advento de dispositivos móveis e plataformas de mídia digital na última década representa o maior choque para a cognição na história humana. Evidências médicas robustas de que as plataformas de mídia digital são viciantes e, quando usadas em excesso, são prejudiciais à saúde mental dos usuários têm surgido. Outros tipos de produtos viciantes, como tabaco e medicamentos vendidos sob prescrição médica, são fortemente regulados para proteger os consumidores. Atualmente, não há qualquer estrutura regulatória que proteja os usuários de mídia digital desses perigos. O enforcement e a regulação antitruste que reduzem as barreiras de entrada podem ajudar os consumidores de redes sociais aumentando a concorrência. A teoria econômica nos diz que mais opções na mídia digital aumentarão a probabilidade de algumas empresas competirem para oferecer plataformas mais seguras e de maior qualidade. Por esse motivo, avaliar os danos à inovação (especialmente a inovação em segurança) e a variedade de produtos pode ser particularmente importante em casos de fusão e conduta envolvendo redes sociais. Outro elemento crítico para o enforcement antitruste neste espaço é uma correta compreensão das características das redes sociais. A análise antitruste padrão busca proibir condutas que prejudiquem o bem-estar do consumidor. Economistas ensinaram à prática antitruste que o aumento de oferta de um bem ou serviço é um parâmetro confiável para o bem-estar do consumidor. No entanto, oferta e bem-estar não têm essa relação quando um produto é viciante. De fato, nos mercados de redes sociais, o aumento da oferta costuma ser prejudicial. Argumentamos que a análise antitruste deve rejeitar o parâmetro de nível de oferta[1] e retornar ao foco no próprio bem-estar do consumidor em casos envolvendo plataformas de redes sociais viciantes. Em particular, as autoridades devem rejeitar teses de defesa que se baseiam apenas em medidas de expansão bruta de oferta, desacompanhadas de evidências de que os aumentos de oferta alegados realmente beneficiem os consumidores. Palavras-chave: antitruste, concorrência, internet, regulação, mídias sociais, vício, law & economics, direito e psicologia, economia comportamental.
Dark patterns are deceptive or manipulative interfaces that modify users' architecture of choice, leading them to act without realizing, against their preferences or against their best interests. They are widely spread in the digital environment and there is multidisciplinary evidence of the individual and structural harms they cause. In this article, we synthesize evidence of dark patterns prevalence, evidence of harms and legal framework. Then, we propose a complementary area of research to contribute to solving the issue: we introduce the concept of fair patterns, as a combination of design-driven innovation and neurodesign, building on the human-centric approach, 'light patterns', 'bright patterns' without paternalism, autonomy preserving protection measures and the newly introduced principle of fairness by design. Beyond the concept, we also propose a grid of criteria to create fair patterns and provide an example of one of our prototypes. We then discuss whether the concept of fair patterns is robust enough to contribute to solving the issue, identify limitations and call for further research, including user testing and a technological solution to scale fair patterns, in addition to training all the stakeholders.
Consistent evidence across important domains shows that people’s decisions can depend on the order or emphasis with which the attributes of the available options are presented to them. We introduce the first model of such framing effects, which we characterize in terms of observable behavior. We apply the model to study how the strategic use of attribute framing affects the outcomes of negotiations and competition in markets. We extend the model to stochastic-choice frameworks, which are often used in practice.
Several antitrust authorities have investigated platform price parity clauses around the world. I analyze the impact of these clauses when platforms design a search environment for sellers and buyers to interact. In a model where platforms choose the unit search cost faced by consumers, I show when platforms can profitably obfuscate consumers through high search costs. Then, I show that price parity clauses, when exogenously given, can increase or reduce obfuscation, prices, and consumer surplus. Finally, when price parity clauses are endogenous, they are only observed in equilibrium if they hurt consumers.
This study estimates spectator willingness‐to‐pay (WTP) for superstars in the National Basketball Association. Using microdata from an online secondary ticket marketplace and player absence announcements, I find 4%–22% ($4–$41) reductions in prices when superstars are announced to miss games. Additionally, LeBron James and Stephen Curry exhibit larger impacts in away games: 21% ($73/ticket) for James and 18% ($50/ticket) for Curry. The findings suggest popularity is a better predictor of WTP than productivity, and in line with existing superstar literature, popularity predicts price impacts convexly. This study provides a novel methodology to estimate superstar value, generating implications for the entertainment industry.
My dissertation studies three cases in which the perception of current policy or beliefs about future policy shaped economic decisions. Issues of attention and beliefs about the future can have tremendous importance both because agent actions reveal what they believe about the future, such as in the first and third chapters, or because misperception change how agents are affected by policy, such as in the second chapter. The first chapter measures the effect of the 2017 Tax Cuts and Jobs Act on share prices of publicly traded firms, finding that the most profitable firms, and those in concentrated industries, benefited the most. The tax bill significantly reduced corporate tax rates, thereby increasing share prices, particularly at the top. Among firms with the highest profit rates, more than 80 percent rose in value on news of the tax reform, whereas among less profitable firms, fewer than 60 percent appreciated. By every measure, stock market gains coincident with the tax bill were concentrated among firms with greater market power. This pattern is consistent with economic rents being important components of the values of large U.S. corporations. The second chapter of my dissertation looks at how to measure welfare in a world where tax policy might be misperceived by agents. Recent developments in behavioral public economics have shown that heterogeneous biases prevent point identification of deadweight loss. The second chapter replicates this result for an arbitrary (closed) consumption set, whereas previous results on heterogeneous attention focused on binary choice. It finds that one can bound the efficiency costs of taxation based on aggregate features of demand. When individuals have linear demand functions, the bounds for deadweight loss are easy to calculate from linear regressions. While the first chapter of my dissertation looks at the effects of expected policy, the third and last chapter looks at higher-order moments. Forecasts of the consequences of tax changes usually assume that economic actors expect these changes are permanent, despite the inevitable political uncertainty that could lead to future reversals or further changes. This reasoning extends to when a firm's tax burden is correlated to the success of its ventures. The third chapter shows how a firm's belief about how government policy is correlated with the input's marginal product distorts its risk profile, leading it to change its input decision. Generally speaking, input use will be discouraged if the firm faces high taxes precisely when the input is more productive. The last chapter shows that in a world of policy uncertainty this holds under an arbitrary tax system, and in particular it holds even if inputs can be perfectly deducted from the firm's taxable income. Whenever the covariance between policy and payoff is zero, the model replicates the classical result that the deductibility of input expenses leaves the decision undistorted. The third chapter uses this theoretical relationship in an empirical model of asset pricing to infer what investors believe about how future government policy correlates with their risky investments in different firms in the stock market. Each chapter’s analysis can be read on its own, but the unifying theme is that in each case issues of perception and belief were central in either identifying current beliefs about the world, or in understanding the real impact of economic policy on agent welfare.
We modify the standard model of price competition with horizontally differentiated products, imperfect information, and search frictions by allowing consumers to flexibly acquire information about a product's match value during their visits. We characterize a consumer's optimal search and information acquisition protocol and analyze the pricing game between firms. Notably, we establish that in search markets there are fundamental differences between search frictions and information frictions, which affect market prices, profits, and consumer welfare in markedly different ways. Although higher search costs beget higher prices (and profits for firms), higher information acquisition costs lead to lower prices and may benefit consumers. We discuss implications of our findings for policies concerning disclosure rules and hidden fees.
We examine whether shrouding or partitioning of a surcharge raises demand in online shopping. In a field experiment with more than 34,000 consumers, we find that consumers in the online shop of a cinema are more likely to select tickets for a 3D movie when the 3D surcharge is shrouded, but they also drop out more often when the overall price is shown at the checkout. In sum, the demand distribution is independent of the price presentation. This result outlines the limits of the effectiveness of shrouding practices.
Recent developments in behavioral public economics have shown that heterogeneous biases prevent point identification of deadweight loss. We replicate this result for an arbitrary (closed) consumption set, whereas previous results on heterogeneous attention focused on binary choice. We find that one can bound the efficiency costs of taxation based on aggregate features of demand. When individuals have linear demand functions, the bounds for deadweight loss are easy to calculate from linear regressions.
Firms often sell a basic good as well as ancillary ones. Hold-up concerns have led to ancillary good regulations, such as transparency and price caps. The hold-up narrative, however, runs counter to evidence in many retail settings where ancillary good prices are set below cost (e.g., free shipping or limited card surcharging in countries where the "no-surcharge rule" was lifted). We argue that the key to unifying these conflicting narratives is that the seller may absorb partly or fully the ancillary good's cost so as not to miss sales on the basic good. A supplier with market power on the ancillary good market then takes advantage of cost absorption and jacks up its wholesale price. Hold-ups occur only when consumers are initially uninformed or naive about the drip price and shopping costs are high. The price of the basic good then acts as a signal of the drip price, since a high markup on the basic good makes the firm more wary of missed sales. Regardless of whether consumers are informed, uninformed but rational, or naive, mandating price transparency and banning loss-making on the ancillary good leads to (i) an efficient consumption of the ancillary good, and (ii) a reduction of its wholesale price, generating strict welfare gains. © The Author(s) 2018. Published by Oxford University Press on behalf of the President and Fellows of Harvard College. All rights reserved.
Following Becker (1957) we ask whether competition will eliminate the effects of behavioral biases. We study the case of shrouded product attributes, such as main- tenance costs, expensive add-ons, and hidden fees. In standard competitive models with costless advertising all firms choose to reveal all product information. We show that information revelation breaks down when some naive consumers do not anticipate shrouded attributes. Firms will not compete by publicly undercutting their competi- tors' add-on prices if (i) add-ons have close substitutes that are only exploited by sophisticated consumers, or (ii) many consumers drop out of the market altogether when the add-on market is made salient. We show that informational shrouding flour- ishes even in highly competitive markets, even in markets with costless advertising and
A fundamental dilemma confronts retailers with stand-alone sites on the World Wide Web and those attempting to build electronic malls for delivery via the Internet, online services, or interactive television (Alba et al. 1997). For consumers, the main potential advantage of electronic shopping over other channels is a reduction in search costs for products and product-related information. Retailers, however, fear that such lowering of consumers' search costs will intensify competition and lower margins by expanding the scope of competition from local to national and international. Some retailers' electronic offerings have been constructed to thwart comparison shopping and to ward off price competition, dimming the appeal of many initial electronic shopping services. Ceteris paribus, if electronic shopping lowers the cost of acquiring price information, it should increase price sensitivity, just as is the case for price advertising. In a similar vein, though, electronic shopping can lower the cost of search for quality information. Most analyses ignore the offsetting potential of the latter effect to lower price sensitivity in the current period. They also ignore the potential of maximally transparent shopping systems to produce welfare gains that give consumers a long-term reason to give repeat business to electronic merchants (cf. Alba et al. 1997, Bakos 1997).
We test conditions under which lowered search costs should increase or decrease price sensitivity. We conducted an experiment in which we varied independently three different search costs via electronic shopping: search cost for price information, search cost for quality information within a given store, and search cost for comparing across two competing electronic wine stores. Consumers spent their own money purchasing wines from two competing electronic merchants selling some overlapping and some unique wines.
We show four primary empirical results. First, for differentiated products like wines, lowering the cost of search for quality information reduced price sensitivity. Second, price sensitivity for wines common to both stores increased when cross-store comparison was made easy, as many analysts have assumed. However, easy cross-store comparison had no effect on price sensitivity for unique wines. Third, making information environments more transparent by lowering all three search costs produced welfare gains for consumers. They liked the shopping experience more, selected wines they liked more in subsequent tasting, and their retention probability was higher when they were contacted two months later and invited to continue using the electronic shopping service from home. Fourth, we examined the implications of these results for manufacturers and examined how market shares of wines sold by two stores or one were affected by search costs. When store comparison was difficult, results showed that the market share of common wines was proportional to share of distribution; but when store comparison was made easy, the market share returns to distribution decreased signi.cantly. All these results suggest incentives for retailers carrying differentiated goods to make information environments maximally transparent, but to avoid price competition by carrying more unique merchandise.
This article shows that accounting for variation in mistakes can be crucial for welfare analysis. Focusing on consumer under-reaction to not-fully-salient sales taxes, we show theoretically that the efficiency costs of taxation are amplified by differences in under-reaction across individuals and across tax rates. To empirically assess the importance of these issues, we implement an online shopping experiment in which 2,998 consumers purchase common household products, facing tax rates that vary in size and salience. We replicate prior findings that, on average, consumers under-react to non-salient sales taxes- consumers in our study react to existing sales taxes as if they were only 25% of their size. However, we find significant individual differences in this under-reaction, and accounting for this heterogeneity increases the efficiency cost of taxation estimates by at least 200%. Tripling existing sales tax rates nearly doubles consumers' attention to taxes, and accounting for this endogeneity increases efficiency cost estimates by 336%. Our results provide new insights into the mechanisms and determinants of boundedly rational processing of not-fully-salient incentives, and our general approach provides a framework for robust behavioural welfare analysis. © The Author(s) 2017. Published by Oxford University Press on behalf of The Review of Economic Studies Limited.
A growing body of empirical literature finds that consumers are relatively limited in how much they search over product characteristics. We assemble a dataset of search and purchase behavior from eBay to quantify the returns, and thus implied costs, to consumer search on the internet. The extensive nature of the eBay data allows us to examine a rich and detailed set of questions related to search in a way that previous structural models cannot. In contrast to the literature, we find that consumers search a lot: on average 36 times per purchase over 3 (distinct) days, with most sessions ending in no purchase. We find that search costs are relatively low, in the region of 25 cents per search page. We pursue the analysis further by, i) examining how users refine their search, ii) how search behavior spans multiple search sessions, and iii) how the amount of search relates to finding lower prices.
We test the equivalence of tax-inclusive, tax-exclusive and tax-rebate prices through a series of experiments differing only in their handling of the tax. Subjects receive a cash budget and decide how much to keep and how much to spend on various attractively priced goods. Subjects spend significantly more under tax-exclusive prices whereas total purchases under tax-inclusive and tax-rebate prices are similar. These results persist throughout most of the ten rounds despite feedback and the ability to revise purchases. The asymmetric response to tax liabilities and rebates highlights consumers' ability both to internalize and to willfully ignore hidden price components.
Marketing researchers recently have expended considerable effort to investigate how price influences buyers' decisions yielding a variety of results, some not entirely explainable. This article reviews the relevant research literature, organizes the results, and suggests new research directions.
Classical statistical inference of experimental data assumes that the treatment affects the test group but not the control group. This assumption will typically be violated when experimenting in marketplaces because of general equilibrium effects: changing test demand affects the supply available to the control group. We illustrate this with an email marketing campaign performed by eBay. Ignoring test-control interference leads to estimates of the campaign's effectiveness which are too large by a factor of around two. We present the simple economics of this bias in a supply and demand framework, showing that the bias is larger in magnitude where there is more inelastic supply, and is positive if demand is elastic.
We present a theory of context-dependent choice in which a consumer's attention is drawn to salient attributes of goods, such as quality or price. An attribute is salient for a good when it stands out among the good's attributes, relative to that attribute's average level in the choice set (or generally, the evoked set). Consumers attach disproportionately high weight to salient attributes and their choices are tilted toward goods with higher quality/price ratios. The model accounts for a variety of disparate evidence, including decoy effects, context-dependent willingness to pay, and large shifts in demand in response to price shocks.
We examine the competition between a group of Internet retailers who operate in an environment where a price search engine plays a dominant role. We show that for some products in this environment, the easy price search makes demand tremendously price-sensitive. Retailers, though, engage in obfuscation—practices that frustrate consumer search or make it less damaging to firms—resulting in much less price sensitivity on some other products. We discuss several models of obfuscation and examine its effects on demand and markups empirically.
Using two strategies, we show that consumers underreact to taxes that are not salient. First, using a field experiment in a grocery store, we find that posting tax-inclusive price tags reduces demand by 8 percent. Second, increases in taxes included in posted prices reduce alcohol consumption more than increases in taxes applied at the register. We develop a theoretical framework for applied welfare analysis that accommodates salience effects and other optimization failures. The simple formulas we derive imply that the economic incidence of a tax depends on its statutory incidence, and that even policies that induce no change in behavior can create efficiency losses. (JEL C93, D12, H25, H71)
This paper examines whether the salience of a tax system affects equilibrium tax rates. I analyze how tolls change after toll
facilities adopt electronic toll collection (ETC); drivers are substantially less aware of tolls paid electronically. I estimate
that, in steady state, tolls are 20 to 40 percent higher than they would have been without ETC. Consistent with a salience-based
explanation for this toll increase, I find that under ETC, driving becomes less elastic with respect to the toll and toll
setting becomes less sensitive to the electoral calendar. Alternative explanations appear unlikely to be able to explain the
findings.
This paper evaluates a pilot program run by a company called OPOWER, previously known as Positive Energy, to mail home energy reports to residential utility consumers. The reports compare a household’s energy use to that of its neighbors and provide energy conservation tips. Using data from randomized natural field experiment at 80,000 treatment and control households in Minnesota, I estimate that the monthly program reduces energy consumption by 1.9 to 2.0 percent relative to baseline. In a treatment arm receiving reports each quarter, the effects decay in the months between letters and again increase upon receipt of the next letter. This suggests either that the energy conservation information is not useful across seasons or, perhaps more interestingly, that consumers’ motivation or attention is malleable and non-durable. I show that “profiling,” or using a statistical decision rule to target the program at households whose observable characteristics suggest larger treatment effects, could substantially improve cost effectiveness in future programs. The effects of this program provide additional evidence that non-price “nudges” can substantially affect consumer behavior.
Traditional discrete-choice models assume buyers are aware of all products for sale. In markets where products change rapidly, the full information assumption is untenable. I present a discrete-choice model of limited consumer information, where advertising influences the set of products from which consumers choose to purchase. I apply the model to the U.S. personal computer market where top firms spend over $2 billion annually on advertising. I find estimated markups of 19% over production costs, where top firms advertise more than average and earn higher than average markups. High markups are explained to a large extent by informational asymmetries across consumers, where full information models predict markups of one-fourth the magnitude. I find that estimated product demand curves are biased toward being too elastic under traditional models. I show how to use data on media exposure to improve estimated price elasticities in the absence of micro ad data. Copyright 2008 The Econometric Society.
Internet shopbots compare prices and services levels at competing retailers, creating a laboratory for analysing consumer choice. We analyse 20,268 shopbot consumers who select various books from 33 retailers over 69 days. Although each retailer offers a homogeneous product, we find that brand is an important determinant of consumer choice. The three most heavily branded retailers hold a $1.72 price advantage over more generic retailers in head-to-head price comparisons. In particular, we find that consumers use brand as a proxy for retailer credibility in non-contractible aspects of the product and service bundle, such as shipping reliability. Copyright 2001 by Blackwell Publishing Ltd