Working Paper: NBER ID: w15201
Authors: Rafael Di Tella; Juan Dubra
Abstract: We propose a model where voters experience an emotional cost when they observe a firm that has displayed insufficient concern for other people's welfare (altruism) in the process of making high profits. Even with few truly altruistic firms, an equilibrium may emerge where all firms pretend to be kind and refrain from charging "abusive" prices to their customers. Our main result is that, as competition decreases, the set of parameters for which such pooling equilibria exist beomes smaller and firms are more likely to anger consumers. Regulation can increase welfare, for example, through fines (even if there are no changes in prices). We illustrate these gains in a monopoly setting, where regulation affects welfare through 3 channels (i) a reduction in monopoly price leads to the production of units that cost less than their value to consumers (standard channel); (ii) regulation calms down existing consumers because a reduction in the profits of an "unkind" firm increases total welfare by reducing consumer anger (anger channel); and (iii) individuals who were out of the market when they were excessively angry in the unregulated market, decide to purchase once the firm is regulated, reducing the standard distortions described in the first channel (mixed channel).
Keywords: Anger; Regulation; Consumer Welfare; Monopoly; Competition
JEL Codes: D64; L4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decrease in competition (L13) | Increase in consumer anger (D19) |
| Regulation (L51) | Reduction in monopoly price (D42) |
| Reduction in monopoly price (D42) | Increase in production of valued goods (O49) |
| Regulation (L51) | Calm existing consumers (D19) |
| Calm existing consumers (D19) | Reduction of profits of unkind firms (D21) |
| Regulation (L51) | Encourage previously angry consumers to enter market (D16) |
| Regulation (L51) | Increase in consumer welfare (D69) |