Why is shopping such a

baffling ordeal, and what

can you do about it?
Alexia Gaudeul
Jena Science Slam
June 2014
I will speak about firms that try to
confuse consumers and about
consumers who make bad choices.
DFG RTG 1411 The Economics of Innovative Change
Friedrich-Schiller-Universitt Jena
What firms do
According to
economists
First take care of two common
misconceptions about firms and
consumers.
What firms do
According to
economists
In reality
Firms will avoid competing if they
can, and prefer to share the
market and set high prices.
Who consumers are
According to
economists
Who consumers are
According to
economists
In reality
Two-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/
Shopping
Jam Chocolate
I will speak about shopping and
how to handle it.
Lots of variety in product lines.
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
Shopping
One way to go about it
Calvin & Hobbes, September 21, 1995.
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.
Worked out example
Making a rational choice: An
attempt (Ipsita).
Worked out example
Worked out example
Worked out example
Unfortunately, a mistake was
made in measuring the height of
the triangle the triangle was
chosen, while the square was
better.
Another example
What to do?
8 6 5
Notice the common standard
does this make the choice easier?
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.
Another example
8 6 5
Drop the circle and choose the
cheapest triangle?
Punish the firm that tried to avoid
competition by confusing
consumers. Why did it do so?
Probably because it is not really
competitive.
If no standardized product
Expected
price that
you pay
Less accurate More 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.
If you drop dominated offer
Less accurate More accurate
Some improvement, but you still
make mistakes
Expected
price that
you pay
Eliminating the dominated
common standard offer improves
your payoff, but you still make
mistakes when comparing to the
non-standard offer.
If drop non-standard offer
If you are confused, choose
among standardized products.
Less accurate More accurate
Expected
price that
you pay
The best thing to do is to choose
the lowest priced common
standard 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.
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
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 the
firm that undercut them.
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 enough
about the product category.
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.
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.