Competition for Context-Sensitive Consumers

Abstract

When preferences are sensitive to context, firms may influence purchase decisions by designing the environment of consumption choices. This paper studies how competitive retailers optimally design their product line if preferences at the store depend on whether the choice set draws consumer attention to the quality or price of a product. Before making a purchase decision, a consumer chooses among retailers without (fully) anticipating that her preferences at the store are malleable. We show that this setup can align evidence on retailer marketing practices and the existence of loss leaders with the experimental literature on decoy effects: in equilibrium, retailers use loss leaders to attract the consumer to the store and decoy products to draw consumer attention at the store to more profitable alternatives featuring a higher price (inducing a profitable upsell) or lower production cost (inducing a profitable downsell). We embed and compare the predictions of three recent specifications of choice-set dependent attention—namely, Salience, Focusing, and Relative Thinking. All three specifications predict that firms construct choice environments that utilize decoy effects to up- or downsell the consumer. Because they differ in how attention can be directed using the product line, however, they differ in their predictions of how the decoy will be positioned in the price-quality space. This paper was accepted by Yan Chen, decision analysis.

Price promotions as a threat to brands

“…Other articles in this vein include Herweg et al (2017), Johnson (2017), Helfrich and Herweg (2020), Apffelstaedt and Mechtenberg (2021), Dertwinkel‐Kalt and Köster (2022), and our companion work in Inderst and Obradovits (2020). Notably, the present contribution builds on our earlier framework in Inderst and Obradovits (2020), where we also study retail competition with salient‐thinking consumers.…”

Excessive Competition on Headline Prices

“…(2016), Herweg et al. (2017), Helfrich and Herweg (2020), Apffelstaedt and Mechtenberg (2021), and Dertwinkel‐Kalt and Köster (2022). Notably, we share with the extant literature the result that such preferences can distort consumers' choices, prices, and ultimately firms' product choices.…”

Model Supporting Development Decisions by Considering Qualitative–Environmental Aspects

“…As a result, it was shown that the presented model was 84% accurate in predicting quality. Another example was [17], in which customer decisions were supported by predicting changes in their decisions based on the quality and price of the product. Specifications dependent on customer choice (importance, focus, and relative thinking) and the decoy effect were compared, and it was determined that the decoy effect was similarly important to the price and quality of the product.…”

“…It has been shown that the product quality level can be predicted [14][15][16][17][18]. In addition, the impact of products on the natural environment can be predicted [19][20][21][22].…”