Failing to Choose the Best Price: Theory, Evidence, and Policy

Grubb, Michael D.

doi:10.1007/s11151-015-9476-x

Cited by 89 publications

(54 citation statements)

References 116 publications

(177 reference statements)

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“…While I focus on overconfidence, and in particular on two important mistakes made by overconfident consumers-misforecasting consumption and overestimating ability to navigate contract terms-the lessons in the paper apply more broadly to all such biases. In contrast, behavioral biases that limit search, generate inertia, or confuse choices in a manner uncorrelated across consumers have starkly different market implications that I discuss in Grubb (2015b).…”

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confidence: 97%

Overconfident Consumers in the Marketplace

Grubb

2015

Journal of Economic Perspectives

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112

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When consumers sign contracts, expectations about future usage of the product or service matter. For instance, the value provided by car insurance depends on how likely a consumer believes she is to file a claim; the value provided by a gym membership depends on how often a consumer anticipates going to the gym; and the value provided by a cellular phone contract depends on how many gigabytes of data a consumer anticipates using. The standard modeling paradigm makes the expedient assumption that consumers have rational expectations. Imposing rational expectations drastically simplifies models and eliminates the need to directly measure beliefs as they coincide with the distribution of observed outcomes. Yet a large literature shows that consumer beliefs often deviate substantially from rational expectations in systematic ways. This has important consequences for contract design, firm profits, consumer welfare, and public policy.The term overconfidence is used broadly in the psychology literature, referring to both overoptimism and overprecision. Overoptimistic individuals overestimate their own abilities or prospects, either in absolute terms or in comparison to others. In contrast, overprecise individuals place overly narrow confidence intervals around forecasts, thereby underestimating uncertainty. These biases can lead consumers to misforecast their future product usage, or to overestimate their abilities to navigate contract terms. In consequence, consumer overconfidence causes consumers

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confidence: 97%

Overconfident Consumers in the Marketplace

Grubb

2015

Journal of Economic Perspectives

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112

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“…For example, some may exhibit strongly "cost optimising" behaviour, while others may not choose the cheapest option every time. Individuals make investment choices without the benefit of perfect information of all their options [64], and different consumers and companies have different requirements and preferences that blurs the notion of the "average technology cost". The approach in BLUE to market heterogeneity is modelled after the approach taken in the CIMS [65] and Res-IRF/IMACLIM-R [63] hybrid energy economy models.…”

Section: Market Heterogeneity Vmentioning

confidence: 99%

Modelling energy transitions for climate targets under landscape and actor inertia

Strachan

2017

Environmental Innovation and Societal Transitions

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The speed at which established socioeconomic and technological systems can be adapted to alternatives that are compatible with a climate stabilised, 2°C world remains unknown. Quantitative models used for assessing this challenge typically make a number of arguably optimistic assumptions regarding human behaviour and decision making. This often restricts the insights produced to futures approximating a so-called first-best policy landscape. However, empirical studies of socio-technical change have shown that technological diffusion is often influenced by actors and institutions interacting under less ideal, second-best conditions. This paper quantifies these factors in a formal energy model as landscape and actor inertia and employs them for the first time in BLUE, a dynamic stochastic socio-technical simulation of technology diffusion, energy and emissions inspired by the multi-level perspective. Using the UK energy system as an example, the results illustrate how socio-technical inertia may significantly blunt future efforts to achieve climate targets. KeywordsSocio-technical change; transitions; energy systems; modelling; decarbonisation; climate policy; Highlights We present a quantitative socio-technical energy transitions model inspired by the Multi-Level Perspective  BLUE is a stochastic system dynamic model that features multiple actors with detailed behavioural parameters  The feasibility of UK climate targets is explored under landscape and actor inertia  The results show that actor inertia may significantly increase the difficulty of achieving climate targets  The results also show the importance of taking socio-technical perspectives on energy transitions

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“…Empirical evidence shows that intentional obfuscation does occur (Célérier & Vallée, 2013;Ellison & Ellison, 2009;Hossain & Morgan, 2007;McDonald & Wren, 2013;Muir, Seim, & Vitorino, 2013;Wenzel, 2013;Woodward & Hall, 2010). Books, reviews, and policy papers explore how firms manipulate and deceive consumers who "search too little, become confused comparing prices" and fail to switch from their default options (Akerlof & Shiller, 2015;Beales, Craswell, & Salop, 1981;Garrod, Hviid, Loomes, & Price, 2009;Grubb, 2015;Spiegler, 2015). Indeed, "the common use of tariff proliferation (...) is collusive in nature" according to Siciliani (2014).…”

Section: Literaturementioning

confidence: 99%

Choosing not to compete: Can firms maintain high prices by confusing consumers?

Crosetto

Gaudeul

2017

Economics Manag Strategy

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Firms with very similar products often present their products in different ways. This makes it difficult for consumers to find out which product fits their needs best, or which one is the cheapest. Why is there no convergence toward common ways to present products? Is it possible for firms to maintain high prices by confusing consumers? We run a market experiment to investigate those questions. In our market, firms choose how to present their products in addition to choosing their price. We find that firms maintain different ways to present their products and that this allows them to maintain high prices. This behavior is not consistent with competitive behavior, such as when firms adopt best responses to each other, imitate the most successful firm, or learn the best strategy over time. Rather, our results are only consistent with cooperation between firms. Firms cooperate by not imitating the way other firms present their products. Cooperation is maintained by the threat of tough competition if a firm makes its product easy to compare with others. Firms are all the more likely to maintain such cooperation if their products do not actually differ much. This is because in that case, maintaining differences in the presentation of their products is the only way to maintain profits.

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Failing to Choose the Best Price: Theory, Evidence, and Policy

Cited by 89 publications

References 116 publications

Overconfident Consumers in the Marketplace

Overconfident Consumers in the Marketplace

Modelling energy transitions for climate targets under landscape and actor inertia

Choosing not to compete: Can firms maintain high prices by confusing consumers?

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