Noncompensatory consideration and compensatory choice: an application to Stackelberg competition

Abstract

Unlike standard models of choice, experimental evidence suggests that individuals avoid tradeoffs when choice problems are complex. I analyze the implications of consumers using noncompensatory choice heuristics in a simple Stackelberg game in which firms offer menus of multi-attribute alternatives and influence the attribute considered to be salient by consumers via marketing. I illustrate that there is a tight link between optimal menu design and marketing strategies in equilibrium and briefly discuss the choice-theoretic properties of the consumer's choice procedure.

Duopolistic competition with choice-overloaded consumers

“…The broad literature which our paper belongs to attempts to analyze the effects of various forms of consumer bounded rationality on the outcome of firm competition. Examples include consumer loss aversion (Heidhues and Köszegi, 2008;Karle and Peitz, 2014;Carbajal and Ely, 2016), inattention (Eliaz and Spiegler, 2011;de Clippel, Eliaz, and Rozen, 2014;Bordalo, Gennaioli, and Shleifer, 2016;Manzini and Mariotti, 2017), bounded-rational expectations (Gabaix and Laibson, 2006;Spiegler, 2006), comparison difficulty (Piccione and Spiegler, 2012;Bachi and Spiegler, 2014;Papi, 2014) and satisficing (Papi, 2017). 17 In sharp contrast to many of these models where firms add complexity/obfuscation to their price structures and hence manage to sustain positive markups, our analysis highlights the potentially beneficial effect that menu simplicity can have in the firms' efforts to increase their market share.…”