Do Consumers Prefer Offers that are Easy to Compare?

Do Consumers Prefer Oers that are Easy to Compare?An experimental investigation

Paolo Crosetto & Alexia GaudeulMax Planck Institute of Economics & GSBC, University of Jena

April 20, 2012. ACLE workshop on Behavioral Competition and Regulation Amsterdam

Do Consumers Prefer Oers that are Easy to Compare?

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Paolo Crosetto & Alexia Gaudeul

A general debateBehavioural 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 choiceKahneman, 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)

What should we do about it?Do Consumers Prefer Oers that are Easy to Compare? 3 / 23 Paolo Crosetto & Alexia Gaudeul

Nudges vs. consumer sovereigntyStandard approach. Call the State to make choices for consumers, prevent rms from misleading them, punish socially indesirable activities, etc... Soft Paternalism. Frame consumer options (for their own good!) (Thaler & Sunstein, Nudge, 2008). Consumer Sovereignty. Let consumers make their own decisions!Sugden, Why incoherent preferences do not justify paternalism, 2008. Especially so as experts often have no idea what is consumers own good (Freedman, Wrong: Why Experts Keep Failing Us, 2010)

= 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

What to do against confusopolies?Get rms to simplify their oerings, so as to make their products easier to compare. Advise consumers what is the best product, and/or make sure they choose that one. Educate consumers so they can make their own choices accurately. Gaudeul & Sugden (2011) argue that as long as some consumers prefer oers that are easy to compare, then rms that try to confuse consumers will be weeded out.Gaudeul & Sugden, Spurious Complexity and Common Standards in Markets for Consumer Goods, Economica 2011.


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The common standard ruleA consumer wants to buy a fruit and is faced with the choice between three sellers, two with oranges, one with apples. Oranges are priced at $0.45 and $0.55 respectively, while the price of the apple is $0.70. The consumer estimates the oranges contain 35 calories each while he guesses the apple contains 55 calories. The lower priced orange thus appears to cost $1.29 per 100 calories, while the apple appears to costs $1.27 per 100 calories. However, the consumer still chooses the lower priced orange. Why?First, because he is not sure about caloric content (statistical argument) Second, because orange sellers are in tighter competition, so their price ought to be lower (strategic argument)Do Consumers Prefer Oers that are Easy to Compare? 7 / 23 Paolo Crosetto & Alexia Gaudeul

Gaudeul & Sugden 2011: Key ResultsIf consumers prefer to choose among oers that are easy to compare then:1

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.

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Problem: Do consumers really prefer common standards?Do Consumers Prefer Oers that are Easy to Compare? 8 / 23 Paolo Crosetto & Alexia Gaudeul

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 compareDo Consumers Prefer Oers that are Easy to Compare? 9 / 23 Paolo Crosetto & Alexia Gaudeul

Example 3-menu

Figure: A menu with a common standard

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

Example 3-menu, solved

Figure: A menu with a common standard


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What heuristics can consumers follow?Two criteria for choosing between products:1

Based on imperfect observation of unit prices (signals):up ij = upi + eij , i the rm, j the consumer; eij depending on the complexity of the comparison and the individual.

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Based on whether the product belongs to a Common Standard (CS) or not:Prices are directly comparable within a standard easier to compare.


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Four heuristics + 1

First

Common Standard

Signals

Second

SignalsThreshold

No Signals

Common Standard

No Common Standard

Rule

DE Dominance Editing

LPCS Lowest Priced Common Standard

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

Payo by rule, easy menus

Figure: Payos by rule, as a function of choice accuracyDo Consumers Prefer Oers that are Easy to Compare? 14 / 23 Paolo Crosetto & Alexia Gaudeul

Some remarksMore 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 experimentRun 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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Result I: Errors were madeAs expected and as desired, consumers made relatively bad choicesOverall, only 39% of choices were optimal In 59 out of 80 tasks, the majority of the subjects were wrong About 6% of people chose dominated standard oers!

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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Result II: Common standards helped consumers

Mean 3-menu No CS One CS No CS One CS Two CS 10.41 10.45

Hard menus Std Dev 0.92 0.96 0.81 0.98 0.87

N 1818 1818 1818 1818 808

Mean 11.02 13.34

Easy menus Std Dev 4.56 3.96 4.11 5.48 4.34

N 1818 1818 1818 1818 808

6-menu

10.14 10.04 10.78()

11.97 13.84 12.78()

* 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

Result III: Women favored common standard oersRegression analysis (mixlogit), shows that:1

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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Result IV: Only few consumers followed the threshold ruleWe used menus with no CS to predict consumer choice among menus with a CS under dierent selection rules. Aggregate consumers behavior is best predicted with a threshold rule that applies a 4 to 5% price penalty to non-standard oers As many as 15% of consumers favored CS oers when choosing among 3-menus, but less than 5% did so when choosing among 6-menus. A penalty of 15 to 20% was applied to non-standard oers by those consumers who favored CS oers (savvy consumers).


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Result V: Even savvy consumers were not fully rationalEven so, savvy consumers still did not penalize non-CS oers suciently given their level of inaccuracy in selecting oers.3menus13 14

6menus

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9

50

100

150

200

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10

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12

13

100

150

200


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Result VI: Common Standard oers generated higher revenues

LPCS 3-menu No CS One CS No CS One CS 0.2725 0.1190

HPCS 0.0298 0.0176

IS 0.1643 0.1786 0.0816 0.0860

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 upThe 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.

= Will such a process of convergence occur in the lab? Stay tuned!Do Consumers Prefer Oers that are Easy to Compare? 23 / 23 Paolo Crosetto & Alexia Gaudeul

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Do Consumers Prefer Offers that are Easy to Compare?