A new mechanism for product tests à la Consumer Reports, Stiftung Warentest and Co. – Adopting a long-term perspective with endogenous price and quality, and unknown distribution of quality
Final Report Abstract
This line of research addresses a real-world problem in settings in which consumers are worse informed than sellers. Independent product testing organizations can reduce asymmetric information about product quality between buyers and sellers. However, limited testing capacity leads to testing of only a select number of product models, often bestsellers, and any current selection mechanism may yield suboptimal information for buyers. In the very first project in this line of research, “Test me if you can – Providing optimal information for consumers” (Vollstaedt et al., mimeo), we propose a novel, testing capacityneutral mechanism based on voluntary disclosure. To analyze its performance in the short term, we develop a game and show theoretically that a unique Nash equilibrium exists in which our mechanism leads to optimal information equivalent to a world of complete information. Therefore, it weakly dominates any current mechanism. Furthermore, we confirm experimentally that our mechanism increases consumer surplus. In a follow-up study, “Test me if you can – Increasing long-term consumer surplus through a novel product testing mechanism” (Imcke et al., mimeo), we analyze the performance of Vollstaedt et al.’s (mimeo) mechanism in the long term. We develop a new game, the longterm product testing game, and refine the algorithm to select among all applicant product models. Using this game and the refined algorithm, we show theoretically that our new product model selection mechanism leads to up to 95% of the consumer surplus under complete information. We are pleased that this result is largely consistent with the theoretical results from the short-term (project 0). As to the experimental setting, we develop the experimental instructions and z-Tree code. During this follow-up study, we were surprised that the long-term game and, in particular, the treatment representing any current mechanism, turned out to be significantly more complex than the short-term game. Therefore, we departed from traditional methods and developed a new, computerized way with C++ to solve for equilibria. We plan to use this new method also for analyzing the game given that buyers do not know the distribution of quality. After having finished the lab follow-up projects, our next steps in this line of research are to take our new mechanism from the lab to the field. Eventually, the ultimate goal of this line of research is to refine our new mechanism such that it can be applied by real product testing organizations in order to provide better information for real consumers.
Publications
- Increasing consumer surplus through a novel product testing mechanism, Ruhr Economic Paper 887.
Vollstaedt, U., Imcke, P., Brendel, F., Ehses-Friedrich, C.
(See online at https://doi.org/10.1257/rct.6685-3.0)
