Firms engage in numerous profit-increasing activities that exploit the weaknesses of consumers. Common methods include onerous procedures for cancelling a contract, the use of misleading advertisement, withholding or misrepresentation of important information, trapping consumers via complex contract terms they misunderstand or predictably fail to study, the shrouding of fees most consumers end up incurring, as well as the careful design of contracts, shops, sales talks, or websites to exploit psychological biases. As a result, policy makers and regulators, such as the Competition and Markets Authority in the UK, argue that
“[c]onsumers rightly feel ripped off, let down and frustrated. They should not have to be constantly ‘on guard’ or spend hours negotiating to get a good deal. This erodes peoples trust in markets …” CMA (2018, p. 5)
To make matters worse, intuition and existing evidence suggests that the above exploitation techniques hurt especially vulnerable consumer groups, such as the poor, the elderly, the less educated, or the less focused or more gullible. For example, psychologically appealing financial products that are, in fact, expensive, unnecessarily complex, and risky, are best sold to those who understand them the least.
Consumer limitations express themselves in predictable patterns of behavior that firms are aware of, and – unless regulated efficiently – use to increase their profits. Emerging evidence suggests that this behavior of firms may induce significant welfare losses. Yet, structural models that allow an exact quantification of these losses as well as to evaluate policies aimed at improving market outcomes are almost non-existing. Our research group seeks to develop tools to better understand and help overcome (or at least reduce) the exploitation of consumers. To do so, first, we identify and study some of the most important mistakes that make consumers the target of exploitation. Second, we investigate how firms intentionally address these mistakes in ways that maximize their profits. Third, based on this fundamental knowledge, we investigate practical regulatory methods that may limit the effectiveness of exploitation techniques – or make the use thereof unprofitable per se. The research group is organized alongside these three interdependent research areas. Each area is structured into three projects lead by the various PIs of the research group. Together, by identifying and understanding relevant human mistakes and how firms address them, our research group ultimately aims to reduce consumer exploitation.
Here you will find detailed information about each of our three research areas.