Paolo Crosetto and I just released a new working paper: “Do consumers prefer offers that are easy to compare? An experimental investigation”. It is available at SSRN at the following address: http://ssrn.com/abstract=1943603.
We deal in this paper with the problem of how to handle firms that deliberately make their offerings too complex so as to make consumers’ choice more difficult. Paternalistic regulation would deal with this by either assisting consumers in their choices or limiting what firms can do.
We test an idea in Gaudeul and Sugden (2011)* according to which the problem can be solved if at least some consumers recognize that offers that are easy to compare with others are usually better deals.
If at least some consumers limit their choices to those offers that are easily comparable, firms will adopt common ways to present their offers and will have to compete based on the really important characteristics of their products.
Since we wished to test if consumers indeed behave as we predicted, we designed an original experiment whereby we invited people from the subject pool of the Max Planck Institute in Jena and asked them to buy paint. Each offer was represented by the surface the paint can cover for a given price.
The difficulty is that each surface area was presented in different shapes of different sizes. That made the offers’ unit prices per area covered difficult to assess. However, offers that were of the same shape and area were easy to compare. If we were correct, our participants would prefer those offers.
Here is an example below:
In the case above, the offer on the right is better than the one in the middle (it is the same size and shape and is cheaper). But it is difficult to compare with the one to the left. We show in the paper that a consumer that is not too good at comparing shapes and calculating unit prices should just ignore the offer on the left and go for the offer on the right. Some indeed did so, but others followed different choice rules.
We found that subjects were indeed bad at making accurate choices and that when some offers within a menu were expressed in terms of the same shape and the same area (i.e. they adhered to a common standard), then they tended, overall, to prefer the common standard offer that had the lowest price. Those who did so were better off than others, i.e. they spent less money on average.
Our results are interesting in so far as they are also not completely one-sided in favor of our hypotheses. For example, while participants did tend to prefer offers that were comparable with others, they still tended to be confused when the menu included too many offers (we had cases where there were 6 offers in a menu rather than the three in the graph above). So firms may just keep on confusing consumers by simply presenting more alternatives.
Our paper is a really good entry point into the debate over consumer protection and exploitative practices by firms. It makes use of insights from a number of areas of research in economics (behavioral economics, industrial organization, experimental economics, political economy).
Feedback and discussion from our presentations at different workshops and conferences has been really encouraging so far, so we will keep on exploring the issue from the firm’s side as well.
In our experiment, firms that made offers in terms of a common standard AND were low priced made higher profits than other firms, meaning that firms ought to have an incentive to present their products so they are comparable with others. Whether they would indeed do so is something we want to test in the laboratory.
See also Paolo Crosetto’s excellent blog post about our paper here.