Competition for Context-Sensitive Consumers

Apffelstaedt, Arno; Mechtenberg, Lydia

doi:10.2139/ssrn.3572028

Cited by 10 publications

(10 citation statements)

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“…That retailers can benefit from offering decoy goods is also shown by Apffelstaedt and Mechtenberg (2016). Here, like in our model, the goods available at the store the consumer entered determine a consumer's reference good and thus whether quality or price is salient.…”

Section: Related Literaturementioning

confidence: 66%

Salience in Retailing: Vertical Restraints on Internet Sales

Helfrich

Herweg

2017

SSRN Journal

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We provide an explanation for a frequently observed vertical restraint in ecommerce, namely that brand manufacturers partially or completely prohibit that retailers distribute their highquality products over the internet. Our analysis is based on the assumption that a consumer's purchasing decision is distorted by salient thinking, i.e. by the fact that he overvalues a product attribute -quality or price -that stands out in a particular choice situation. In a highly competitive low-price environment like on an online platform, consumers focus more on price rather than quality. Especially if the market power of local (physical) retailers is low, price tends to be salient also in the local store, which is unfavorable for the high-quality product and limits the wholesale price a brand manufacturer can charge. If, however, the branded product is not available online, a retailer can charge a significant markup on the high-quality good. As the markup is higher if quality rather than price is salient in the store, this aligns the retailer's incentives with the brand manufacturer's interest to make quality the salient attribute and allows the manufacturer to charge a higher wholesale price. We also show that, the weaker are consumers' preferences for purchasing in the physical store and the stronger their salience bias, the more likely it is that a brand manufacturer wants to restrict online sales. Moreover, we find that a ban on distribution systems that prohibit internet sales increases consumer welfare and total welfare, because it leads to lower prices for final consumers and prevents inefficient online sales.

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Section: Related Literaturementioning

confidence: 66%

Salience in Retailing: Vertical Restraints on Internet Sales

Helfrich

Herweg

2017

SSRN Journal

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“…17 For a more detailed analysis that also allows for consumer heterogeneity see Herweg, Müller and Weinschenk (2017). Apffelstaedt and Mechtenberg (2016) also investigate when retailers profit from offering a decoy good. In their model, a consumer's utility differs between the point in time when he makes purchasing plans and the point in time when he actually purchases.…”

Section: Decoy Goodsmentioning

confidence: 99%

Salience in markets

Herweg¹,

Müller²,

Weinschenk³

2018

Handbook of Behavioral Industrial Organization

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A consumer's evaluation of a product often depends on the choice context. Specifically, the choice context influences which of a product's attributes the consumer perceives as outstanding, i.e., salient. This chapter is devoted to a particular model of context-dependent choice, the model of salient thinking introduced by Bordalo, Gennaioli, and Shleifer (2013b), and its application to models of industrial organization. We first restate the model's main implications for consumer behavior. Thereafter, we address how a profit-maximizing firm responds to its consumers' choice behavior being context dependent. To this end, we present a streamlined model of market competition when consumers are salient thinkers, which allows us to synthesize several important implications of context-dependent choice for market outcomes that have been discussed in the literature. Furthermore, within this model, we develop novel insights regarding how firms can benefit from manipulating consumers' choice context by offering decoy goods. Finally, we survey the extant applications of the theory of salient thinking to models of industrial organization, discuss the empirical evidence in support of the theory of salient thinking, and outline venues for future research.

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“…In Johnson (2017), it pays firms to attract consumers with below‐cost offers as they underestimate their propensity to make further, unplanned purchases. In Apffelstaedt and Mechtenberg (2018), consumers who are attracted by a competitively priced “bait” product are induced to purchase a different, higher‐margin product by exploiting a “local‐thinking” bias once they are in the shop. Their analysis can be seen as complementary to ours, as in our model, consumers' choice in the prominent, loss‐leading category distorts their selection between retailers, rather than the selection at the chosen point of sale, as in Apffelstaedt and Mechtenberg (2018).…”

Section: Introductionmentioning

confidence: 99%

“…In Apffelstaedt and Mechtenberg (2018), consumers who are attracted by a competitively priced “bait” product are induced to purchase a different, higher‐margin product by exploiting a “local‐thinking” bias once they are in the shop. Their analysis can be seen as complementary to ours, as in our model, consumers' choice in the prominent, loss‐leading category distorts their selection between retailers, rather than the selection at the chosen point of sale, as in Apffelstaedt and Mechtenberg (2018). Our mechanism may be particularly applicable to the aforementioned staple goods that are frequently used as loss leaders, where consumers indeed compare offers at a distance, though we thereby do not incorporate more impulse‐driven choices for certain products, notably those where consumption is more immediate (e.g., directly at the point of sale).…”

Section: Introductionmentioning

confidence: 99%

Loss leading with salient thinkers

Inderst

Obradovits

2020

The RAND J of Economics

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In various countries, competition laws restrict retailers' freedom to sell their products below cost. A common rationale, shared by policymakers, consumer interest groups and brand manufacturers alike, is that such “loss leading” of products would ultimately lead to a race‐to‐the‐bottom in product quality. Building on Varian's (1980) model of sales, we provide a foundation for this critique, though only when consumers are salient thinkers, putting too much weight on certain product attributes. But we also show how a prohibition of loss leading can backfire, as it may make it even less attractive for retailers to stock high‐quality products, decreasing both aggregate welfare and consumer surplus.

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Competition for Context-Sensitive Consumers

Cited by 10 publications

References 0 publications

Salience in Retailing: Vertical Restraints on Internet Sales

Salience in Retailing: Vertical Restraints on Internet Sales

Salience in markets

Loss leading with salient thinkers

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