Why is shopping such a baffling ordeal, and what can you do about it?

8/12/2019 Why is shopping such a baffling ordeal, and what can you do about it?

1/24

Why is shopping such abaffling ordeal, and what

can you do about it?Alexia Gaudeul

Jena Science Slam

June 2014I will speak about firms that try toconfuse consumers and about

consumers who make bad choices.

DFG RTG 1411 The Economics of Innovative Change

Friedrich-Schiller-Universitt Jena


2/24

What firms do

According to

economistsFirst take care of two common

misconceptions about firms and

consumers.


3/24

What firms do

According to

economists

In reality

Firms will avoid competing if theycan, and prefer to share the

market and set high prices.


4/24

Who consumers are

According to

economists


5/24

Who consumers are

According to

economists

In realityTwo-thirds of consumers are unable to work

out the cheapest energy deal provided by the

big six (UK) power companies (Which? 2014).

http://press.which.co.uk/whichpressreleases/

simplified-energy-tariffs-still-too-confusing/
http://press.which.co.uk/whichpressreleases/simplified-energy-tariffs-still-too-confusing/http://press.which.co.uk/whichpressreleases/simplified-energy-tariffs-still-too-confusing/http://press.which.co.uk/whichpressreleases/simplified-energy-tariffs-still-too-confusing/


6/24

Shopping

Jam Chocolate

I will speak about shopping andhow to handle it.

Lots of variety in product lines.


7/24

Other examples without pictures: phone contracts, electricity, water,

loans, etc

Some of the variety is due to variety in tastes, but some is also about

confusing consumers.

Shopping

Cheese Toothpaste


8/24

Shopping

One way to go about it

Calvin & Hobbes, September 21, 1995.


9/24

An example

1. Compute the quantity (surface).

2. Divide price by quantity.

3. Buy the cheapest product.

8 6 9

Simplify the purchasing scenario

abstract from quality/variety

concern, focus on quantity / price any variety is spurious in the

experiment.


10/24

Worked out example

Making a rational choice: An

attempt (Ipsita).


11/24

Worked out example


12/24

Worked out example


13/24

Worked out example

Unfortunately, a mistake was

made in measuring the height of

the triangle the triangle was

chosen, while the square was

better.


14/24

Another example

What to do?

8 6 5

Notice the common standarddoes this make the choice easier?


15/24

Drop the dearest triangles and

compare circle with triangle?

8 6 5

Another example

The wrong way to do things

punishes the firm that was ready

to compete.


16/24

Another example

8 6 5

Drop the circle and choose the

cheapest triangle? Punish the firm that tried to avoidcompetition by confusingconsumers. Why did it do so?

Probably because it is not reallycompetitive.


17/24

If no standardized productExpectedprice that

you pay

Less accurateMore accurate

Less accurate less likely to

choose the lowest priced product.

Even without taking into account

the motives of the firm that does

not follow the common standard,

one can argue from a statistical

point of view that choosing the

lowest priced common standard

offer is advantageous.

If price is drawn at random across

three offers, this is the price you

will pay on average, depending on

your accuracy in selecting an offer.


18/24

If you drop dominated offer


Some improvement, but you still

make mistakes

Expectedprice that

you pay

Eliminating the dominated

common standard offer improves

your payoff, but you still make

mistakes when comparing to thenon-standard offer.


19/24

If drop non-standard offer

If you are confused, choose

among standardized products.


Expectedprice that

you pay

The best thing to do is to choose

the lowest priced commonstandard offer and ignore the rest

if you are less accurate.

You might miss some good non-

standard offers sometime, but on

average you will do better that

way.


20/24

What do people do?

About 15% of people favour

offers that are easy to compare.

Even fewer do so when there are

many offers.

Crosetto P. and Gaudeul A. (2011)

Do Consumers Prefer Offers that are Easy to Compare?

Jena Economic Research Papers 2011-044

http://ssrn.com/abstract=2001489
http://ssrn.com/abstract=2001489http://ssrn.com/abstract=2001489http://ssrn.com/abstract=2001489


21/24

What do firms do?

If firms can observe each other,they avoid making their offers

comparable. Otherwise, they choose common

standards and price is driven lower.

Crosetto P. and Gaudeul A. (2014)

Competition when firms can confuse consumers

in progress

Avoid showing a competing firm

what the other firm offered you;

firms may reward you for this by

lowering their price, but they will

use the information to punish thefirm that undercut them.


22/24

Conclusion

If products are all the same:(loans, phone, electricity, gas, water, flour,

eggs, etc)

Avoid offers that are difficult to

compare with others.

This applies also if you do not care

or understand differences

between products, potentially

because you do not know enoughabout the product category.


23/24

Conclusion

If products really differ:

Beware of complicated price

formats! Avoid non-inclusive prices, sales

and promotions, special offers

Avoid buy one get one free,

reduced offers, linked offers (e.g.

car + financing): they might be

advantageous sometime, but think

also about the motivations of the

firm.


24/24

Epilogue

And Calvin has to do without the peanut butter

Indeed, if there is too much variety, consumers

may end up not buying any.

(The tyranny of choice, The Economist, 2010,http://www economist com/node/17723028)

Calvin & Hobbes, September 21, 1995.
http://www.economist.com/node/17723028http://www.economist.com/node/17723028

Documents

Why is shopping such a baffling ordeal, and what can you do about it?