drip pricing and its regulation experimental evidence abstract this article analyzes the effects of drip pricing the business practice of decomposing a price into multiple components that are presented sequentially to buyers we experimentally examine the effects of this practice on seller strategies and buyer behaviors and we assess the implications for regulation in our experiment sellers set two prices a base or headline price and a drip price at first buyers observe only the base prices and make a tentative purchase decision subsequently revealing the sellers drip prices however comes at a cost to buyers we find that sellers only compete on base prices and thus set the highest possible drip price this makes the base price a reliable indicator for the lowest total price moreover few consumers invest in drip price searches a comparison with bertrand competition reveals significant effects with drip pricing consumer surplus is lower and seller profits are higher when there is uncertainty over possible drip sizes sellers also compete over drips and consumers more frequently fail to identify the cheapest offer bertrand competition also leads to higher consumer surplus and lower firm profits in this case hence our results point to positive effects of drip price regulation

strategic price complexity in retail financial markets abstract there is mounting empirical evidence to suggest that the law of one price is violated in retail financial markets there is significant price dispersion even when products are homogeneous also despite the large number of firms in the market prices remain above marginal cost and may even rise as more firms enter in a non cooperative oligopoly pricing model i show that these anomalies arise when firms add complexity to their price structures complexity increases the market power of the firms because it prevents some consumers from becoming knowledgeable about prices in the market in the model as competition increases firms tend to add more complexity to their prices as a best response rather than make their disclosures more transparent because this may substantially decrease consumer surplus in these markets such practices have important welfare implications

the market for quacks a group of n quacks plays a price competition game facing a continuum of patients who recover with probability whether or not they acquire a quack s treatment if patients chose rationally the market would be inactive i assume however that patients choose according to a boundedly rational procedure which re ects anecdotal reasoning this element of bounded rationality has signi cant

focusing and framing of risky alternatives abstract this paper develops a theory of focusing and framing in an intertemporal context with risky choices we provide a selection criterion between existing theories of focusing by allowing a decision maker to choose her frame such that her attention is either drawn to salient events associated with an option or to the expected utilities an option yields in different time periods our key assumption is that a decision maker can choose her frame in a self serving manner we predict that the selected frame induces overoptimistic actions in the sense that subjects underrate downside risk but overrate upside risk and accordingly reveal overoptimistic choices hence our theory can explain phenomena such as excessive harmful consumption smoking unhealthy diet and risky investments entrepreneurship lotteries gambling in one coherent framework notably overoptimistic actions are not universal but have plausible limits we characterize under which situations overoptimistic actions are most likely to occur and under which circumstances choices should be rational or even pessimistic

do pharmacists buy bayer informed shoppers and the brand premium we estimate the effect of information and expertise on consumers willingness to pay for national brands in physically homogeneous product categories in a detailed case study of headache remedies we find that more informed or expert consumers are less likely to pay extra to buy national brands with pharmacists choosing them over store brands only 9 percent of the time compared to 26 percent of the time for the average consumer in a similar case study of pantry staples such as salt and sugar we show that chefs devote 12 percentage points less of their purchases to national brands than demographically similar nonchefs we extend our analysis to cover 50 retail health categories and 241 food and drink categories the results suggest that misinformation and related consumer mistakes explain a sizable share of the brand premium for health products and a much smaller share for most food and drink products we tie our estimates together using a stylized model of demand and pricing

price competition when three are few and four are many abstract i examine price competition in a market for a homogeneous good when consumers observe prices subject to a random shock perception error when firms have symmetric costs there exists a unique equilibrium in pure strategies which is symmetric when there are up to three sellers in the market the sellers extract the entire consumer surplus however with at least four firms assuming that the marginal cost is sufficiently low relative to consumers valuation both consumers and producers may enjoy a positive surplus the marginal cost pricing is never observed in an equilibrium with finitely many firms potential policy implications are discussed

sales quantity surcharge and consumer inattention quantity surcharges occur when retailers carry a product in two sizes and offer a promotion on the small size the large size then costs more per unit than the small one when quantity surcharges occur sales of the large size decline only slightly even though the same quantity can be purchased for less we document this behavior in two data sets and four product categories it is consistent with the notion of passive shoppers found in the industrial organization literature and the notion of rational inattention in macroeconomics we discuss implications for consumer decision making demand estimation and firm pricing

prominence complexity and pricing this paper analyzes prominence in a homogeneous product market where two firms simultaneously choose both prices and price complexity levels complexity limits competing offers comparability and results in consumer confusion confused consumers are more likely to buy from the prominent firm in equilibrium there is dispersion in both prices and price complexity the nature of equilibrium depends on prominence compared to its rival the prominent firm makes higher profit associates a smaller price range with lowest complexity puts lower probability on lowest complexity and sets a higher average price however higher prominence may benefit consumers and conditional on choosing lowest complexity the prominent firm s average price is lower which is consistent with confused consumers bias

price competition under limited comparability this paper studies market competition when firms can influence consumers ability to compare market alternatives through their choice of price formats we introduce random graphs as a tool for modelling limited comparability of formats our main results concern the interaction between firms equilibrium price and format decisions and its implications for industry profits and consumer switching rates we show that narrow regulatory interventions that aim to facilitate comparisons may have adverse consequences for consumer welfare finally we argue that our limited comparability approach provides a new perspective into the phenomenon of product differentiation

modeling the economic interaction of agents with diverse abilities to recognize equilibrium patterns we model differences among agents in their ability to recognize temporal patterns of prices using the concept of debruijn sequences in two dynamic models of markets we demonstrate the existence of equilibria in which prices fluctuate in a pattern that is independent of the fundamentals and that can be recognized only by the more competent agents jel c7 d4 s477

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

duopolistic competition with choice overloaded consumers a large body of experimental work has suggested the existence of a choice overload effect in consumer decision making faced with large menus of choice options decision makers often defer or avoid choice a suggested reason for the occurrence of this effect is that the agents attempt to avoid the cognitive effort that is associated with choosing from larger menus building on this explanation we propose and analyse a model of duopolistic competition where firms compete in menu design in the presence of a consumer population with heterogeneous preferences and overload menu size thresholds the firms strategic trade off is between offering a large menu in order to match the preferences of as many consumers as possible and offering a small menu in order to avoid losing choice overloaded consumers to their rival assuming uniformly distributed preferences we focus on symmetric pure strategy equilibria under various assumptions on the overload distribution and product markups we also propose and analyse a measure of consumer welfare that applies to this environment among other things we provide conditions for maximum and minimum variety equilibria to be possible whereby both firms either offer the entire set of available products or the same one product respectively

optimal consumption and investment under time varying relative risk aversion abstract we consider the continuous time consumption investment problem originally formalized and solved by merton in case of constant relative risk aversion we present a complete solution for the case where relative risk aversion with respect to consumption varies with time having in mind an investor with age dependent risk aversion this provides a new motivation for life cycle investment rules we study the optimal consumption and investment rules in particular in the case where the relative risk aversion with respect to consumption is increasing with age

price competition with satisficing consumers abstract the satisficing heuristic by simon 1955 has recently attracted attention both theoretically and experimentally in this paper i study a price competition model in which the consumer is satisficing and firms can influence his aspiration price via marketing unlike existing models whether a price comparison is made depends on both pricing and marketing strategies i fully characterize the unique symmetric equilibrium by investigating the implications of satisficing on various aspects of market competition the proposed model can help explain well documented economic phenomena such as the positive correlation between marketing and prices observed in some markets

beyond revealed preference choice theoretic foundations for behavioral welfare economics we propose a broad generalization of standard choice theoretic welfare economics that encompasses a wide variety of nonstandard behavioral models our approach exploits the coherent aspects of choice that those positive models typically attempt to capture it replaces the standard revealed preference relation with an unambiguous choice relation roughly x is strictly unambiguously chosen over y written xp y iff y is never chosen when x is available under weak assumptions p is acyclic and therefore suitable for welfare analysis it is also the most discerning welfare criterion that never overrules choice the resulting framework generates natural counterparts for the standard tools of applied welfare economics and is easily applied in the context of specific behavioral theories with novel implications though not universally discerning it lends itself to principled refinements

inferior products and profitable deception we analyse conditions facilitating profitable deception in a simple model of a competitive retail market firms selling homogenous products set anticipated prices that consumers understand and additional prices that naive consumers ignore unless revealed to them by a firm where we assume that there is a binding floor on the anticipated prices our main results establish that bad products those with lower social surplus than an alternative tend to be more reliably profitable than good products specifically 1 in a market with a single socially valuable product and sufficiently many firms a deceptive equilibrium in which firms hide additional prices does not exist and firms make zero profits but perversely 2 if the product is socially wasteful then a profitable deceptive equilibrium always exists furthermore 3 in a market with multiple products since a superior product both diverts sophisticated consumers and renders an inferior product socially wasteful in comparison it guarantees that firms can profitably sell the inferior product by deceiving consumers we apply our framework to the mutual fund and credit card markets arguing that it explains a number of empirical findings regarding these industries

a more general model of price complexity this paper considers a model of competition in prices and price complexity levels which accommodates concave and convex confusion technologies in symmetric equilibrium the probability of using high complexity increases in the number of firms in the limit as the number of competitors goes to infinity firms use high complexity almost surely but the impact on consumer welfare depends on the characteristics of the confusion technology specifically industry profits converge to the highest level with concave confusion technologies and to the lowest level when with convex confusion technologies an improvement in consumer sophistication increases consumer welfare but does not reduce market complexity

collusion with intertemporal price dispersion we develop a theory of optimal collusive intertemporal price dispersion dispersion clouds consumer price awareness encouraging firms to coordinate on dispersed prices our theory generates a collusive rationale for price cycles and sales patient firms can support optimal collusion at the monopoly price for less patient firms monopoly prices must be punctuated with fleeting sales the most robust structure involves price cycles that resemble edgeworth cycles low consumer attentiveness enhances the effectiveness of price dispersion by reducing the payoff to deviations involving price reductions however for sufficiently low attentiveness price rises are also a concern

the effects of regulating hidden add on costs we examine the welfare effects of price and disclosure regulation in a model where firms can shroud add on costs such as penalty fees for consumer financial products such regulation can increase or decrease welfare even when there are no direct costs there are however strong complementarities between price controls and disclosure mandates conditional on disclosure being mandated price controls always weakly increase welfare and conditional on prices being sufficiently constrained disclosure mandates always weakly increase welfare

putting on a tight leash and levelling playing field an experiment in strategic obfuscation and consumer protection the paper reports the results of an experiment where asymmetric sellers of a product can obfuscate the market we show that policy measures may have unintended effects of increasing obfuscation incentives we find that policies that limit the effectiveness of obfuscation and policies that promote parity between firms can lead less prominent firms to increase their obfuscation efforts despite this unintended effect however the former type of policies is effective in boosting consumer welfare

helping consumers know themselves in standard models with asymmetric information the parties involved are assumed to have private information about their own characteristics in the health insurance market for example customers are typically assumed to know more about their health status than insurers do and if the customers use this information in deciding whether to buy insurance we have a classic case of adverse selection modern data gathering technologies however can reverse this situation for example because cell phone providers keep and analyze detailed records they can know more about a consumer s expected usage than the customer herself does similarly a credit card company may know more about a customer s probability of incurring a late fee than the customer herself we explore the consequences of this reversal in the information asymmetry 1 a bare bones model examines how providing consumers with information about their own usage affects prices and welfare we first establish the rather obvious result that taking prices as given consumers benefit from having better information about their own usage they can choose the pricing plans that are more suitable for them recent

consideration sets and competitive marketing we present a model of competitive marketing based on the notion that consumers are boundedly rational and that firms use marketing tactics in an attempt to influence consumers decision process the standard model of consumer behaviour assumes that the consumer applies well defined preferences to a perfectly perceived set of available alternatives we retain the assumption that consumers have stable preferences but relax the assumption that they have a perfect perception of what is relevant for their consumption problem thus allowing firms to manipulate that perception our aim is to explore the market implications of this departure from the standard model especially for the way firms deploy marketing strategies in competitive environments the cornerstone of our model is the observation that in the modern marketplace consumers face an overwhelmingly large variety of products and therefore often use screening criteria deliberate as well as unconscious in order to reduce the number of relevant alternatives as a result consumers apply their preferences not to the set of objectively feasible alternatives but to a potentially smaller set which they construct at an earlier stage of the decision process borrowing a term from the marketing literature we refer to this set as the consideration set the basic idea underlying this term is that consumers may be unaware of some of the feasible products and even when they become aware of a new product they still need to be persuaded to consider it as a potential substitute to their currently consumed product

price complexity and buyer confusion in markets abstract this paper reports a duopoly market experiment that examines the effects of price complexity on market prices in my experimental posted offer markets each seller offers an identical good to buyers with homogeneous preferences first sellers simultaneously decide on the price and the tariff structure of their good then buyers make their choices each seller can choose to have a one two or three part tariff the tariff structure affects neither the value nor the price of the good but influences buyers ability to calculate the good s price the main results show that high price sellers choose high complexity more often than low price sellers if buyers are simulated in accordance with the bounded rationality model of carlin 2009 however the evidence for this effect is weaker if the buyers are human subjects importantly prices are higher when the sellers can confuse buyers using price complexity than when sellers interact with perfectly rational robot buyers

on the existence of pure and mixed strategy nash equilibria in discontinuous games a game is better reply secure if for every nonequilibrium strategy x and every payoff vector limit u resulting from strategies approaching x some player i has a strategy yielding a payoff strictly above u i even if the others deviate slightly from x if strategy spaces are compact and convex payoffs are quasiconcave in the owner s strategy and the game is better reply secure then a pure strategy nash equilibrium exists better reply security holds in many economic games it also permits new results on the existence of symmetric and mixed strategy nash equilibria

stock markets in africa emerging lions or white elephants abstract the number of stock markets in african countries has doubled over the last 7 years although these markets remain small and illiquid they are growing rapidly and will become an increasingly important part of many african economies using examples taken from experience in other developing regions and africa s recent past this paper evaluates the common economic criticisms of stock markets and the political pitfalls involved in their operation it concludes that the positive economic effects of bourses on african economies are far larger than any negative effects and argues that the political costs can be mitigated while political benefits can also be gained it finishes by suggesting reforms that can be put in place to reap more benefits and further reduce costs from stock markets on the continent

on price recognition and computational complexity in a monopolistic model a single seller of an indivisible good operates in a market with many consumers who differ in their ability to process information the consumers constraints are modeled in two submodels the first in terms of the limits on the number of sets in the partition of the price space and the second in terms of the limits on the complexity of the operation he can use to process a price offer for the construction of the second submodel the tool of a perceptron is borrowed from the parallel computation literature assuming a negative correlation between the seller s cost of supply of the good and the consumer s ability to process information i demonstrate that the heterogeneity of consumer s abilities can be used by the seller to profitably discriminate among them