Working Papers

[1] Search Costs and Context Effects, joint with Heiko Karle, Florian Kerzenmacher, and Frank Verboven [pdf]

Empirical search cost estimates are often large and increasing in the size of the transaction, even if search can be done conveniently online. To assess this pattern systematically, we conduct an online search experiment in which we manipulate the price scale while keeping the physical search effort for each price quote constant. We also record the time subjects need to obtain a price quote in order to derive a direct measure of subjects’ time and hassle costs of search. Based on a standard search model, we confirm that search cost estimates are large relative to directly elicited search costs and increasing in the price scale. We then modify the search model to allow for context effects, i.e., the tendency that people become less sensitive to price variations of fixed size when the price scale or range of outcomes increases. With the modified model, we find scale-independent search cost estimates that correspond well to subjects’ directly elicited search costs. We show that the consumer welfare losses from context effects can be quite substantial and discuss how empirical work could deal with scale-effects.

[2] Competitive Markets, Add-On Prices, and Boundedly Rational Expectations [pdf]

We analyze the trade of differentiated products with potentially hidden add-on prices. Boundedly rational consumers mistakenly believe that product choice has no effect on the probability of incurring add-on charges. However, all consumers correctly anticipate their equilibrium expenses, so there are no “surprise charges.” Shrouding equilibria with inefficient trade exist in this setting, but only if the market is sufficiently competitive. The presence of boundedly rational consumers can generate innovation incentives that improve welfare relative to the rational benchmark. The model explains why informational interventions often have only small effects on behavior, while add-on price regulation increases consumer surplus.

[3] Persuasion of Loss-Averse Receivers Through Early Offers, joint with Heiko Karle and Rune Vølund [pdf]

We study a simple bargaining model in which the sender can make early offers to the receiver. Initially, the sender has private information about the value of the receiver’s outside option. The receiver learns this value before she chooses between the sender’s early offer and her outside option. Nevertheless, if the receiver is expectation-based loss averse, the sender can persuade her to accept an offer that is inferior to her outside option. This result is due to the interaction of two effects: the attachment effect that makes it costly for the receiver to reject an offer that she planned to accept, and the uncertainty effect which renders the acceptance of the sender’s offer as the preferred plan since it creates peace of mind at an early stage. We show that, under mild restrictions, the main result holds for all degrees of loss aversion. Thus, expectation-based loss-averse preferences imply that there is scope for persuasion through signaling even if the receiver has all payoff-relevant information at the decision stage.