Bait and ditch: Consumer naïveté and salesforce incentives

Abstract

We analyze a model of price competition between a transparent retailer and a deceptive one in a market where a fraction of consumers is naïve. The transparent retailer is an independent shop managed by its owner. The deceptive retailer belongs to a chain and is operated by a manager. The two retailers sell an identical base product, but the deceptive one also offers an add‐on. Rational consumers never consider buying the add‐on while naïve ones can be “talked” into buying it. By offering the manager a contract that pushes him to never sell the base good without the add‐on, the chain can induce an equilibrium in which both retailers obtain more‐than‐competitive profits. The equilibrium features price dispersion and market segmentation, with the deceptive retailer targeting only naïve consumers whereas the transparent retailer serves only rational ones.

Financial fraud and investor awareness

“…Even for papers with similar results, their mechanisms are different from ours. For instance, in Herweg and Rosato (2020), market segregation is driven by firms facing different degrees of agency frictions, and in , it comes from consumers having heterogeneous search costs.…”

Cursed Consumers and the Effectiveness of Consumer Protection Policies*

“…Finally, the mechanism through which consumer protection policy may backfire in our framework has some parallels with the search literature that demonstrates how the presence of informed consumers may harm uninformed ones by increasing firms' market power (Anderson and Renault [2000]; Armstrong [2015]). Within the behavioral industrial organization literature, related versions of this softening of competition effect arise in Johnen [2020] and Herweg and Rosato [2020]. While these two papers consider rather different settings, they, like us, feature nonmonotonicities of consumer and total welfare in the proportion of naive consumers.…”