Strategic Product Placement and Pricing in Markets with Inattentive Consumers

Abstract

This dissertation contains three seperate chapters. <br /> In the first chapter we model a market with hidden product details and systematic consumer biases in which firms have the possibility to unshroud and thereby to rectify such market obliquities. While the classical view was that firms will have an incentive to unshroud, Gabaix and Laibson (2006) show that there exist constellations in which firms prefer to leave the market shrouded. Building on that model we introduce a more strategic and long-term dimension of unshrouding which turns out to fundamentally alter the underlying incentives to unshroud. In particular, we show that there exists an incentive to unshroud that stems from differences in add-on profitability and that it is dependent on parameter constellations whether a more profitable or a less profitable firm will want to unshroud. <br /> In the second chapter we investigate the impact of consumer myopia on competition and firm behavior. In our model, firms repeatedly sell a primary good and a respective add-on. We study the impact of consumer myopia in the add-on market on pricing and on the ability of firms to engage in collusion. We show that in a situation in which firms cartelize and charge monopoly prices, limited attention makes deviation from such collusive behavior less rewarding and hence facilitates collusion. In particular, we determine the incentives of firms to educate consumers. We find that a shrouded market in which no firm educates consumers is a sign for cartelization. Hence, if obfuscation is observed in a market, it can serve as a proxy signal for illegal industry agreements. <br /> In the third chapter we analyze how firms design their product lines when facing customers with limited attention. We assume that consumers simplify complex decision problems by neglecting several of the relevant aspects. Whether and to what extent a customer pays attention to an attribute of a product depends on the importance of the attribute as well as its dispersion in the set of alternatives. A firm may thus influence its customers' attention through the range of products it makes available. We show that a firm can increase its profit by introducing goods that have the sole function of manipulating consumer attention. We derive several results on how a firm can profitably employ such manipulating goods. In particular, even with a homogenous consumer population our model can explain product differentiation.