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FOR 5392:  Consumer Preferences, Consumer Mistakes, and Firms' Response

Subject Area Social and Behavioural Sciences
Term since 2023
Project identifier Deutsche Forschungsgemeinschaft (DFG) - Project number 462020252
 
Firms engage in numerous profit-increasing activities that exploit the weaknesses of consumers. Common methods include onerous procedures for cancelling a contract, the use of misleading advertisement, withholding or misrepresentation of important information, trapping consumers via complex contract terms they misunderstand or predictably fail to study, the shrouding of fees most consumers end up incurring, as well as the careful design of contracts, shops, sales talks, or websites to exploit psychological biases. As a result, policy makers and regulators, such as the Competition and Markets Authority in the UK, argue that “[c]onsumers rightly feel ripped off, let down and frustrated. They should not have to be constantly ‘on guard’ or spend hours negotiating to get a good deal. This erodes peoples trust in markets …”. Consumer limitations express themselves in predictable patterns of behavior that firms are aware of, and – unless regulated efficiently – use to increase their profits. Emerging evidence suggests that this behavior of firms may induce significant welfare losses. Yet, structural models that allow for an exact quantification of these losses as well as for the evaluation of policies aimed at improving market outcomes are almost non-existing. Our research group seeks to develop tools to better understand and help reduce the exploitation of consumers. To do so, first, we identify and study some of the most important mistakes that make consumers the target of exploitation. Second, we investigate how firms intentionally address these mistakes in ways that maximize their profits. Third, based on this fundamental knowledge, we investigate practical regulatory methods that may limit the effectiveness of exploitation techniques with a special focus on online environments. Together, by identifying and understanding relevant human mistakes and how firms address them, our research group ultimately aims to reduce consumer exploitation. We build on the existing literature in behavioral industrial organization, which, however, is still very much limited with regard to at least three aspects. First, existing work is almost exclusively theoretical. While a large body of literature empirically documents that consumers differ from the classic model in many environments, with very few noteworthy exceptions this literature abstracts from analyzing the interaction between firm behavior and consumer mistakes. Second, with very few modest exceptions, in existing behavioral market models firms and consumers contract at most once. The static nature of the signing-up decision in these models precludes a number of important (policy) issues – such as, for example, the exploitation of inert consumers. Third, there is little formal analysis of the implication of consumer mistakes for the functioning and regulation of the digital economy. Our research unit will develop models and empirical methods that help to overcome these policy-relevant shortcomings.
DFG Programme Research Units
International Connection Australia, Austria, Italy, United Kingdom, USA

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