Bait and Ditch: Consumer Naïveté and Salesforce Incentives

This seminar is part of the Department of Economics Seminar Series 2017-18. The seminars are open to all - no registration necessary. If you would like to receive email notification of the Department’s seminars, please send your request to Kim.Edmunds.1@city.ac.uk.

We analyse a model of price competition between a transparent retailer and a deceptive one in a market where a fraction of consumers is naïve. 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 naïve 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 equilibrium features market segmentation with the deceptive retailer targeting only naïve consumers whereas the transparent retailer serves only rational ones. Consumer welfare is not monotone in the fraction of naïve consumers. Hence, policy interventions designed to de-bias naïve consumers might backfire.

Read the abstract.