Robustness of The Attraction Effect in Consumer Choice and Its Consequences For The Firms

Robustness of the attraction
eect in consumer choice

and its consequences for the rms
Alexia Gaudeul
September 22, 2014
work joint with Paolo Crosetto and Robert Sugden
Introduction
Gaudeul & Sugden, 2012
Crosetto & Gaudeul, 2014
References
What I will present
Series of papers investigating why choice is so dicult.
Started with Robert Sugden when at Centre for Competition Policy,

University of East Anglia,
Inspired by Wilson and Price (2010):
Very poor choice of electricity, water and gas providers by British
Despite competition and those being commodities.
consumers.
Note also Ayal, 2011; Bar-Gill and Stone, 2009; Lambrecht and Skiera,
2006; Miravete, 2003; Viswanathan, Rosa, and Harris, 2005
Robustness of the attraction eect in consumer choice
2 / 37
Alexia Gaudeul
Introduction
References
What I will present (2)
Gaudeul and Sugden (2012), Economica
If consumers dislike oers that are dicult to compare with others.

Then rms would be led to adopt common formats in
presenting/designing their oering.
Leading to easy choice and high competition.
Issue: This does not appear to be the case (...)
Where did we go
wrong?
3 / 37
Alexia Gaudeul
Introduction
References
What I will present (3)
At the University of Jena, work with Paolo Crosetto:
Crosetto and Gaudeul (2014b), Testing the strength and robustness

of the attraction eect in consumer decision making, under
submission.
Test when consumers favor dominant oers.
At the Max Planck Institute of Economics, further work with Paolo

Crosetto:
Crosetto and Gaudeul (2014a), Choosing whether to compete:
Test when rms make their products comparable.
Competition when rms can confuse consumers, under submission.
4 / 37
Alexia Gaudeul
Introduction
References

Spurious Complexity and Common Standards in Markets for
Consumer Goods
Economica, 79, pp. 209-225
5 / 37
Alexia Gaudeul
Introduction
References
Context
Research on human judgment and decision-making tells us that

people are subject to biases and make systematic errors (Ariely,
2008).
`Bad' choices are often made (Kahneman, 2011), and those `bad'
choices are often also bad for society (Thaler and Sunstein, 2008).
Firms can exploit these errors and biases, e.g. by introducing

spurious complexity (Gaudeul and Sugden, 2012)
a.k.a. obfuscation (Ellison and Ellison, 2009), shrouding (Gabaix and

Laibson, 2006), foggy pricing (Miravete, 2011), confusion (Chioveanu
and Zhou, 2012), price complexity (Carlin, 2009), spurious product
dierentiation (Spiegler, 2011, Chapter 6, Section 3), etc...
Promoting confusion is a source of market power (Scitovsky, 1950).
6 / 37
Alexia Gaudeul
Introduction
References
Nudges vs. consumer sovereignty
What should we do about it?
Standard approach: Call the State to regulate: we need carrots and

sticks.
Soft (Libertarian, Asymmetric) Paternalism: Call the Choice

Architects: we need to limit or frame consumer options (for their own
good!) (Thaler and Sunstein, 2008; Camerer, Issacharo,
Loewenstein, O'Donoghue, and Rabin, 2003).
Consumer Sovereignty: Let consumers make their own decisions

(Sugden, 2008, 2009)
7 / 37
Alexia Gaudeul
Introduction
References
Denition of term: Format
Decisions can be made more complex by displaying similar products

in dierent ways or under dierent price plans.
We call a format all accessory product characteristics.
To paraphrase Spiegler (2011, p.151), an aspect of a product's

presentation that is of no relevance to a consumer's utility and yet
aects his ability to make comparisons among alternatives.
For example price format, standard (as in common standard) or a

frame (as in framing eect).
8 / 37
Alexia Gaudeul
Introduction
References
Example: Black Tea
Brand name
Nr of
sachets
Qty in
sachets
Price
Herba
Teekanne
Dennree
Marco Polo
20
20
20
25
1.5g
1.75g
1.5g
1.5g
A
C 0.89
A
C 1.55
A
C 1.19
A
C 1.09
9 / 37
Alexia Gaudeul
Introduction
References
Example: Black Tea
Herba
Teekanne
Dennree
Marco Polo
20
20
20
25
1.5g
1.75g
1.5g
1.5g
Price
A
C 0.89
A
C 1.55
A
C 1.19
A
C 1.09
Price/100g
A
C 2.97
A
C 4.42
A
C 3.97
A
C 2.91
Brand name
Nr of
sachets
Qty in
sachets
10 / 37
Alexia Gaudeul
Introduction
References
Key Results
If some consumers prefer even to a small extent those oers
that share the same format then:
1. There is an incentive for rms to adopt the same format as their
competitors and undercut them.
2. This increases competition and leads to lower prices among rms
that have a common format.
3. Generating even more consumer preferences for common formats.
4. Which leads to a competitive equilibrium with comparable oers.
11 / 37
Alexia Gaudeul
Introduction
References
Why should consumers choose among comparable

oers?
Why do we believe consumers (ought to) focus on comparable oers?
Behavioral: The asymmetric dominance eect is well known and
Statistics: if prices i.i.d. but unknown, and three oers
studied (decoy, attraction eect) (Huber, Payne, and Puto, 1982).

with formats
(a, a, c),
then
E (min(pA , pB )) E (pC )
(A, B, C )
(Monty Hall
problem, vos Savant, 1990) so one ought to choose the lowest

priced of the comparable oers.
Simplicity + wide applicability: it is a rule of thumb that can be

translated to many settings (Sugden, 1989).
Strategic consumer: Knows comparable oers are likely less
Preference for simplicity, a sign of fairness? (Homburg, Totzek, and
expensive.
Krmer, 2014)
12 / 37
Alexia Gaudeul
Introduction
References
Crosetto and Gaudeul, 2014

Testing the strength and robustness of the attraction eect in
consumer decision making
under submission
13 / 37
Alexia Gaudeul
Introduction
References

In Crosetto and Gaudeul (2014b) we:
1. Test if, and how much, consumers perform asymmetric dominance
editing.
2. By introducing a realistic purchasing task allowing us to identify
several heuristics
Specically, we answer these questions:
1. Which shortlisting heuristics (if any) do consumers use?
2. How do they exploit the presence of comparable oers?
3. Can we measure the intensity of their preference for comparable
oers?
14 / 37
Alexia Gaudeul
Introduction
References
Experimental design
15 / 37
Alexia Gaudeul
Introduction
References
Price, quantity, price/unit

Price
Price
A
B
Quantity
Quantity
16 / 37
Alexia Gaudeul
Introduction
References
Dierence from the standard setting for testing the

attraction eect
Usually, compare menu with two options with menu with three
options, one of which is dominated.
The dominated option is clearly set out as such, in particular by

presenting product characteristics as numbers.
Recent literature conrms, as we do, that the attraction eect

might be limited to such settings (Frederick, Lee, and Baskin, 2014;
Yang and Lynn, 2014).
We go further by dening types of consumers by the decision

process they follow.
We also determine how far their behavior diers from optimal

behavior in a context with uncertainty.
17 / 37
Alexia Gaudeul
Introduction
References
Results I
1. Consumers make relatively bad choices.
2. Payos are higher when there are comparable oers, on average
and at the individual level.
3. Dominants oers are chosen more often than predicted by their
price.
3.1 if there are 3 options but not if there are 6.
3.2 if close to other comparable oers in menus with 3 options.
3.3 if options are hard to compare (close prices) in menus with 6 options.
18 / 37
Alexia Gaudeul
Introduction
References
Results II: Penalties on non-comparable oers
Estimate
o = up + up NCO + up dominated + . . .
yijm
jm
jm
jm
jm
jm
Penalty on non-comparable oers is
/.
4% penalty on non-comparable oers in 3-menus, 2% in 6-menus.
19 / 37
Alexia Gaudeul
Introduction
References
Results III Assigment to rules
Consumers can be assigned to a range of heuristics depending on

individual
oers),
(price sensitivity),
(dislike for non-comparable
(elimination of dominated oers).
Parameters
Signicant?
Decision rule
No
No
No
Random
Yes
No
No
Naive
No
Yes
Dominance editing
Yes
Yes
Asymmetric dominance editing
Yes
No
Dislike NCOs
20 / 37
Alexia Gaudeul
Introduction
References
Results III Assigment to rules (2)
Small minority apply signicant penalty on non-comparable oers.
-40%
-20%
0%
Estimated penalty
20%
40%
Random
Dislike NCO
20
20
Frequency
40
Frequency
40
60
60
80
6-menus
80
3-menus
-40%
Naive
Asym. Dom.
-20%
0%
20%
40%
Dominance
21 / 37
Alexia Gaudeul
Introduction
References
Results IV Dierence from optimal behavior
Subjects favor dominant oers
much less than what would be
optimal for them.
Overcondence in their ability to choose correctly?.

6-menus
Penalty
0%
-40%
-40%
-20%
-20%
Penalty
0%
20%
20%
40%
40%
3-menus
14
13
12
11
10
9
Payoff in menus without comparable offers
14
13
12
11
10
9
Payoff in menus without comparable offers
22 / 37
Alexia Gaudeul
Introduction
References
Would this type of preferences drive confusopoly away?

Firms faced with our consumers would make more prot by deviating
to a common format
Comparable oers sell at a slightly lower price, sell more, and most
of sales go to the dominant option
Given these data, with our consumers it is a dominant strategy for

rms to imitate another and undercut it.
But is the number of savvy consumers and the strength of
their preference enough to break a confusopoly?
23 / 37
Alexia Gaudeul
Introduction
References

Choosing whether to compete: Competition when rms can
confuse consumers
under submission
24 / 37
Alexia Gaudeul
Introduction
References
Design: Spurious dierentiation
Supply:
Three rms, A, B and C.

Each rm
choose between its own format and format A. Sets price
pi .
Demand:
Consumers make mistakes
= {0, e}
re. value for the good.
Value for the good of rm
Type A
Consumers
Type B
Type C
v +e
v
v
v
v +e
v
v
v
v +e
25 / 37
Alexia Gaudeul
Introduction
References
Design: Articial consumers
100 consumers of each type j .
Within each type:
%
v + j p i
%
1
consumers choose rm
perceived as having the highest net
value
consumers who buy based on
v + j NCOi pi (1 + NCOi X )
NCOi = 1 if i is not comparable, 0 else.

X > 0 the penalty on non-comparable oers.
is the portion of savvy consumers,
is the strength of their
preference for dominant oers.
26 / 37
Alexia Gaudeul
Introduction
References
Treatments
Replicate standard market (X
Then set
= 15%
= 15%
= 30%
= 30%
and
and
and
and
X
X
X
X
= 15%
= 30%
= 15%
= 30%
= 0)
as baseline.
(our paper), and vary around those values:
Variation in the amount of information available to rms re.

competitor: full or none.
27 / 37
Alexia Gaudeul
Introduction
References
Market dynamics
1
0000
000
000
00
0
0
00
0
0
0 0 0
0
0
0
00
0
0
0
0
0
00 0
0 0
00
00
11
1 00000
1100 0
0
1 00
1 0
0
1
10
0
0
0
0 1
10 00
00
0
0
1
00
0
00
1
0
0 1 10
0
0 01
101
101
1
0
1
00
1
0
00 0
00 0
00
0
00 0
000 0
0
00
0
0
0 0
0
10
0
0
1
0
0
00
0
00
00
0 0
0
0
00
0
0
0
0
00
0
0000
0
0
0
0
0
1 0
0 000 0
0 0000
0
0
0
0
0
000
1
1
0
01
0 1
1 0
000
1
00
00
0
0
0
0
00 0
0
010
1
0
000000000
0
0
price
0
0
0
00
0
0
0
0
00
0
0
00
0
0
00
0
0
0
0
0
1
00
0
00
110
0
0
1
0
0
0
0
0
0
11
0 100
00
0 1 0
0
00
0
0
0
0
0
00
0
0
0
00
0 0
0
101
00
0
0
0
0
00
0
0
0
0
0
0
0
0
0
1
0
10
00
1
0
0
0
0
0 1
0
0
1
0
0
0
0
1
1 0 0
0
110
0
0
0
00
0
0
0
0
0
00
1
00
1 110
0
0
0
0
1
0
0
0
0
0
0
0 0
00
0
0
0
1
00
110
0
0
1
1 1
0
1
0
1
0
0
10
1
00
1
0
0
10
15
10
15
10
Robustness of the attraction eect in consumer choice period
15
10
28 / 37
15
10
15
Alexia Gaudeul
Introduction
References
Results I
Table: Eective price and % of periods with comparable oers.
Limited
information
Full
information
X 10%
20%
X 10%
20%
0%
1.76
40%
10%
1.71
48%
()
()
1.67
57%
1.86
33%
()
1.95
42%
()
1.77
40%
20%
1.62
54%
()
()
1.66
68%
()
2.05
44%
()
2.14
37%
Wilcoxon rank-sum test, signicance of dierence w.r.t.value on the left (dierence w.r.t.
value below in parenthesis), - (p>0.05), * (p<0.05), ** (p<0.01), *** (p<0.001).
29 / 37
Alexia Gaudeul
Introduction
References
Results II
Firms are able to collude in shrouding their oers.
Avoid periods of intense competition when they make their oers

comparable.
Ability to make prices transparent can help collusion.
Consumer welfare is enhanced in treatments with no mutual

monitoring.
30 / 37
Alexia Gaudeul
Introduction
References
Summing up
We underlined the importance of the attraction eect in

discouraging rms from confusing consumers.
We introduced a new design to test choice heuristics in a clean

environment.
The experiment enabled us to quantify preference for comparable

oers.
With such preferences, rms have incentive to adopt others'

formats and underprice.
But if rms can observe each other, then they can maintain a
confusopoly
31 / 37
Alexia Gaudeul
Introduction
References
The short version
Jena Science Slam 2014

Video at http://tinyurl.com/science-slam-jena (10 minutes)
32 / 37
Alexia Gaudeul
Introduction
References
References (1)
Ariely, D. (2008):
Predictably Irrational. HarperCollins.
Ayal, A. (2011): Harmful Freedom of Choice: Lessons from the Cellphone

Market,
Law and Contemporary Problems, 74, 91133.
Bar-Gill, O., and R. Stone (2009): MOBILE MISPERCEPTIONS,
Journal of Law & Technology, 23(1), 49118.
Harvard
Camerer, C., S. Issacharo, G. Loewenstein, T. O'Donoghue, and M. Rabin

(2003): Regulation for conservatives: Behavioral economics and the case for
asymmetric paternalism,
University of Pennsylvania Law Review, 151(3),
12111254.
Carlin, B. I. (2009): Strategic price complexity in retail nancial markets,
of Financial Economics, 91(3), 278287.
Journal
Chioveanu, I., and J. Zhou (2012): Price competition and consumer confusion,
Working Paper No. 12-19, Economics and Finance Working Paper, Brunel
University.
33 / 37
Alexia Gaudeul
Introduction
References
References (2)
Crosetto, P., and A. Gaudeul (2014a): Choosing whether to compete:
Competition when rms can confuse consumers,
under submission.
(2014b): Testing the strength and robustness of the attraction eect in

consumer decision making.,
Jena Economics Research Paper, #2014021.
Ellison, G., and S. F. Ellison (2009): Search, obfuscation, and price elasticities on
the Internet,
Econometrica, 77(2), 427452.
Frederick, S., L. Lee, and E. Baskin (2014): The Limits of Attraction,
Marketing Research, 51(4), 487507.
Journal of
Gabaix, X., and D. Laibson (2006): Shrouded attributes, consumer myopia, and
information suppression in competitive markets,
Economics, 121(2), 505540.
The Quarterly Journal of
Gaudeul, A., and R. Sugden (2012): Spurious complexity and common standards
in markets for consumer goods,
Economica, 79, 209225.
34 / 37
Alexia Gaudeul
Introduction
References
References (3)
Homburg, C., D. Totzek, and M. Krmer (2014): How price complexity takes its
toll: The neglected role of a simplicity bias and fairness in price evaluations,
Journal of Business Research, 67(6), 11141122.
Huber, J., J. W. Payne, and C. Puto (1982): Adding Asymmetrically Dominated
Journal of
Consumer Research, 9(1), 9098.
Kahneman, D. (2011): Thinking fast and slow. Farrar, Straus and Giroux.
Alternatives: Violations of Regularity and the Similarity Hypothesis,
Lambrecht, A., and B. Skiera (2006): Paying too much and being happy about it:
Existence, causes, and consequences of tari-choice biases,
Marketing Research, 43(2), 212223.
Journal of
Miravete, E. J. (2003): Choosing the wrong calling plan? Ignorance and

learning,
American Economic Review, 93(1), 297310.
(2011): Competition and the use of foggy pricing,
Journal - Microeconomics, 5(1), 194216.

35 / 37
American Economic
Alexia Gaudeul
Introduction
References
References (4)
The American
Economic Review, 40(2), pp. 4853.
Spiegler, R. (2011): Bounded rationality and industrial organization. Oxford
Scitovsky, T. (1950): Ignorance as a Source of Oligopoly Power,
University Press.
Sugden, R. (1989): Spontaneous order,
The Journal of Economic Perspectives,
3(4), 8597.
(2008): Why Incoherent Preferences Do Not Justify Paternalism,
Constit Polit Econ, 19, 226248.
(2009): On nudging: a review of nudge: improving decisions about

health, wealth and happiness by Richard H. Thaler and Cass R. Sunstein,
International Journal of the Economics of Business, 16(3), 365373.

Nudge. Yale University Press.
Thaler, R. H., and C. R. Sunstein (2008):
Viswanathan, M., J. A. Rosa, and J. E. Harris (2005): Decision making and

coping of functionally illiterate consumers and some implications for marketing
management,
Journal of Marketing, 69, 1531.
36 / 37
Alexia Gaudeul
Introduction
References
References (5)
vos Savant, M. (1990): Ask Marilyn, Parade Magazine, September 9, p. 16.
Wilson, C. M., and C. W. Price (2010): Do consumers switch to the best
supplier?,
Oxford Economic Papers.
Yang, S., and M. Lynn (2014): More Evidence Challenging the Robustness and
Usefulness of the Attraction Eect,
Journal of Marketing Research, 51(4),
508513.
37 / 37
Alexia Gaudeul

Robustness of The Attraction Effect in Consumer Choice and Its Consequences For The Firms

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Robustness of the attraction

eect in consumer choice

Gaudeul & Sugden, 2012

Crosetto & Gaudeul, 2014

Crosetto & Gaudeul, 2014

What I will present

Series of papers investigating why choice is so dicult.

Started with Robert Sugden when at Centre for Competition Policy,

Inspired by Wilson and Price (2010):

Very poor choice of electricity, water and gas providers by British

Despite competition and those being commodities.

Robustness of the attraction eect in consumer choice

Gaudeul & Sugden, 2012

Crosetto & Gaudeul, 2014

Crosetto & Gaudeul, 2014

What I will present (2)

Gaudeul and Sugden (2012), Economica

If consumers dislike oers that are dicult to compare with others.

Leading to easy choice and high competition.

Issue: This does not appear to be the case (...)

Robustness of the attraction eect in consumer choice

Gaudeul & Sugden, 2012

Crosetto & Gaudeul, 2014

Crosetto & Gaudeul, 2014

What I will present (3)

At the University of Jena, work with Paolo Crosetto:

Crosetto and Gaudeul (2014b), Testing the strength and robustness

Test when consumers favor dominant oers.

At the Max Planck Institute of Economics, further work with Paolo

Crosetto and Gaudeul (2014a), Choosing whether to compete:

Test when rms make their products comparable.

Competition when rms can confuse consumers, under submission.

Robustness of the attraction eect in consumer choice

Gaudeul & Sugden, 2012

Crosetto & Gaudeul, 2014

Crosetto & Gaudeul, 2014

Gaudeul & Sugden, 2012

Economica, 79, pp. 209-225

Robustness of the attraction eect in consumer choice

Gaudeul & Sugden, 2012

Crosetto & Gaudeul, 2014

Crosetto & Gaudeul, 2014

Research on human judgment and decision-making tells us that

Firms can exploit these errors and biases, e.g. by introducing

a.k.a. obfuscation (Ellison and Ellison, 2009), shrouding (Gabaix and

Promoting confusion is a source of market power (Scitovsky, 1950).

Robustness of the attraction eect in consumer choice

Gaudeul & Sugden, 2012

Crosetto & Gaudeul, 2014

Crosetto & Gaudeul, 2014

Nudges vs. consumer sovereignty

What should we do about it?

Standard approach: Call the State to regulate: we need carrots and

Soft (Libertarian, Asymmetric) Paternalism: Call the Choice

Consumer Sovereignty: Let consumers make their own decisions

Robustness of the attraction eect in consumer choice

Gaudeul & Sugden, 2012

Crosetto & Gaudeul, 2014

Crosetto & Gaudeul, 2014

Denition of term: Format

Decisions can be made more complex by displaying similar products

We call a format all accessory product characteristics.

To paraphrase Spiegler (2011, p.151), an aspect of a product's

eect in consumer choice

Series of papers investigating why choice is so dicult.

Robustness of the attraction eect in consumer choice

If consumers dislike oers that are dicult to compare with others.

Robustness of the attraction eect in consumer choice

Crosetto and Gaudeul (2014b), Testing the strength and robustness

Test when consumers favor dominant oers.

Crosetto and Gaudeul (2014a), Choosing whether to compete:

Test when rms make their products comparable.

Competition when rms can confuse consumers, under submission.

Robustness of the attraction eect in consumer choice

Robustness of the attraction eect in consumer choice

Robustness of the attraction eect in consumer choice

Robustness of the attraction eect in consumer choice

Denition of term: Format

For example price format, standard (as in common standard) or a

Robustness of the attraction eect in consumer choice

Robustness of the attraction eect in consumer choice

Robustness of the attraction eect in consumer choice

Robustness of the attraction eect in consumer choice

Behavioral: The asymmetric dominance eect is well known and

Statistics: if prices i.i.d. but unknown, and three oers

studied (decoy, attraction eect) (Huber, Payne, and Puto, 1982).

Strategic consumer: Knows comparable oers are likely less

Robustness of the attraction eect in consumer choice

Robustness of the attraction eect in consumer choice

Robustness of the attraction eect in consumer choice

Robustness of the attraction eect in consumer choice

Robustness of the attraction eect in consumer choice

Dierence from the standard setting for testing the

Recent literature conrms, as we do, that the attraction eect

We go further by dening types of consumers by the decision

We also determine how far their behavior diers from optimal

Robustness of the attraction eect in consumer choice

Robustness of the attraction eect in consumer choice

Results II: Penalties on non-comparable oers

Penalty on non-comparable oers is

4% penalty on non-comparable oers in 3-menus, 2% in 6-menus.

Robustness of the attraction eect in consumer choice