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Consumer Behavior and Firms’ Response

Area Description

The work program of the research group is divided into three areas. "Consumer Behavior and Firms' Response" is one of them. Each area is divided into three projects. This area's projects are:

Code Project Leader Project Title Institution
P4 Grunewald, Heidhues Firms' Response to Directed Attention Allocation Frankfurt School, HHU
P5 Dertwinkel-Kalt, Normann Firms' Response to Non-Directed Attention Allocation Münster, HHU
P6 Karle, Zulehner Consumer Inertia and Switching Behavior Frankfurt School, Vienna

P4: Firms' Response to Directed Attention Alloation

This project seeks to improve our understanding of how consumers direct attention to different tasks, and how consumer policies that aim to limit the exploitation of inattentive consumers affect the attention allocation of consumers. Competition in the marketplace together with the consumer protection regime determines what consumers need and want to pay attention to, and what consumer pay attention to feeds back into how firms compete for consumers in the first place. We study this nexus of interactions with a focus on consumer attention allocation. To achieve this objective, we will run carefully designed experiments in order to learn more about how well consumer attention allocation decisions correspond to those predicted by existing theories. This will provide a better understanding of how individuals divide cognitive resources across tasks. In market settings, the optimal design of products and contracts by firms affects how consumers allocate their attention across tasks and markets, which in turn feeds back into firms’ decisions how to design products and contracts. Furthermore, consumer policy, which in OECD countries heavily regulates which products and contracts firms may offer in the market, determines how much attention consumers need to spend to avoid being exploited, and thus interacts with consumer attention allocation decisions as well as firms’ strategic decisions. We thus plan to study the impact of various regulatory choices on consumer attention decisions and market outcomes theoretically. Finally, complementing the laboratory evidence as well as the theory developed, we plan to use observational evidence to test how firms respond to limited attention of consumers in the field. We plan to empirically study whether firms discriminate against consumers with more limited attention or lower cognitive ability. We anticipate that our research generates important new insights on the pros and cons of different consumer-protection-regulation regimes.

P5: Firms' Response to Non-Directed Attention Allocation

When facing economic choices, information on the available options is typically vast while consumers’ capacity to process this information is limited. Consumers’ attention, at least in parts, is non-directed and therefore automatically guided toward eye-catching features of the choice environment. Little is known about firms’ incentives to exploit such attentional imperfections of consumers. We investigate non-directed attention allocation for the example of a particularly quickly growing and important market that is currently in the focus of competition authorities around the world, the gaming market. Nowadays, many successful video games feature “loot boxes” that, just like gambling, offer random rewards to be used in-game (with respect to the “FIFA” game such a reward would be, for instance, a virtual Lionel Messi). In 2020 alone, such loot boxes generated $15 billion of worldwide revenue. There is an increasing public concern, however, that video game developers design loot boxes in a way to make gamers “overpay” for the typically small chance of getting the reward. We single out three features of loot boxes that might result in gamers overestimating the probability of winning the reward and, consequently, paying too much. First, developers typically do not disclose the odds, but provide gamers only with an interval-censored distribution of rewards. Second, in many games there is a public announcement whenever someone wins a reward, resulting in gamers observing a biased sample of the reward distribution. Third, high rewards are additionally disclosed in a spectacular visual presentation. In a series of papers, this project seeks to investigate three issues. (i) In laboratory as well as field experiments, we identify the features that drive the success of loot boxes and analyze in how far these features are exploitative in nature. (ii) We ask to what extent firms use these features strategically in order to raise users’ willingness-to-pay. And (iii) with the help of a theoretical model and with market experiments, we investigate how transparency regulations or improved competition in the market can raise welfare.

P6: Consumer Inertia and Switching Behavior

The project "Consumer Inertia and Switching Behavior" aims to examine behavioral explanations for the observed reluctance of consumers to search and switch to better deals. The project will develop a coherent market model that captures different psychological mechanisms that lead to consumer inertia: inattention, procrastination, and psychological switching costs through loss aversion. The model combines such consumer behavior with profit-maximizing firms and asks what features of the market and regulation thereof foster consumer inertia. Once fully developed, this model will be empirically investigated. The empirical analysis will make use of several data sets and encompasses descriptive regressions as well as the estimation of structural demand models. Based on individual data from own survey experiments, the project investigates how easy access to switching opportunities (which will be made available randomly to a subset of users) affects users’ switching behaviour for electricity and mobile phone contracts. The design of the field study allows to account for personal characteristics such as risk and loss attitudes, inattention, and procrastination as possible drivers for heterogeneous responses among users. In addition, the project will use a repeated, representative consumer survey that combines information on consumers’ purchasing decisions, their socioeconomic characteristics, and their attitudes towards risk and loss aversion, inattention, and procrastination to study contract-switching behavior and to elicit beliefs about the expected surplus from switching. The panel data study will also include randomly assigned treatments regarding, for example, switching reminders that are not only interesting from a policy perspective but help distinguish loss-aversion-based inertia from inertia that results from inattention and procrastination.

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