Working Papers

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

Empirical search cost estimates tend to increase 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. Based on a standard search model, we confirm that search cost estimates indeed increase considerably in the price scale. We then modify the search model and allow for diminishing sensitivity, i.e., the tendency that people become less sensitive to price variations of fixed size when the price of the good increases. We find substantial degrees of diminishing sensitivity and obtain search cost estimates that are scale-independent. Importantly, these estimates are in line with subjects‘ true opportunity costs of time. Finally, we show that the consumer welfare loss from diminishing sensitivity can be quite substantial.

[2] Competitive Markets and Boundedly Rational Expectations [pdf]

We analyze the trade of differentiated products when firms set both base and potentially hidden add-on prices. Boundedly rational consumers are subject to coarse reasoning and mistakenly believe that their action (product choice or substitution effort) has no effect on the probability of paying add-on prices. However, all consumers correctly anticipate their equilibrium expenses, so that 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 consumer benchmark. For credit/debit card markets the model explains why informational interventions have only minor effects on behavior, while add-on price regulation increases consumer surplus.

[3] Consumer Loss Aversion and Scale-Dependent Psychological Switching Cost, joint with Heiko Karle and Rune Vølund [pdf]

We consider a model of product differentiation where consumers are uncertain about the qualities and prices of firms’ products. They can inspect all products at zero cost. A share of consumers is expectation-based loss averse. For these consumers, buying products of varying quality and price creates disutility from gain-loss sensations. Even at modest degrees of loss aversion they may refrain from inspecting all products and choose an individual default that is strictly dominated in terms of surplus. Firms’ strategic behavior exacerbates the scope for this effect. The model generates “scale-dependent psychological switching costs” that increase in the value of the transaction. They imply that making switching easier or costless for consumers would not motivate more switching. We find empirical evidence for the predicted association between switching behavior and loss aversion in new survey data.

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