Working Paper: CEPR ID: DP12612
Authors: Fabian Herweg; Antonio Rosato
Abstract: We analyze a model of price competition between a transparent retailer and a deceptive one in a market where a fraction of consumers is naive. The transparent retailer is an independent shop managed by its owner. The deceptive retailer belongs to a chain and is operated by a manager. The retailers sell an identical base product, but the deceptive one also offers an add-on. Rational consumers never consider buying the add-on, yet naive ones can be talked into buying it. By offering its store manager a contract that pushes him to never sell the base good without the add-on, the chain can induce an equilibrium in which both retailers obtain more-than-competitive profits. The equilibriumfeatures market segmentation with the deceptive retailer targeting only naive consumers whereas the transparent retailer serves only rationalones. Welfare is not monotone in the fraction of naive consumers in the market. Hence, policy interventions designed to de-bias naive consumers might backfire.
Keywords: addon pricing; bait and switch; consumer naiveté; incentive contracts
JEL Codes: D03; D18; D21; L13; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumer naiveté (D18) | pricing strategies (D49) |
| salesforce incentives (M52) | pricing strategies (D49) |
| consumer naiveté (D18) | retailer profits (L81) |
| salesforce incentives (M52) | retailer profits (L81) |
| pricing strategies (D49) | retailer profits (L81) |
| fraction of naive consumers (D16) | pricing strategies (D49) |
| fraction of naive consumers (D16) | welfare (I38) |
| salesforce incentives (M52) | welfare (I38) |