Buridanic competition. (English) Zbl 1393.91038

Bachi, Benjamin; Spiegler, Ran

Games Econ. Behav. 107, 298-315 (2018).

Summary: We analyze a model of two-attribute competition for a decision maker who follows a non-compensatory choice procedure that only responds to ordinal rankings along the two dimensions. The decision maker has an outside option that functions as a default alternative. In the absence of a dominant alternative, the decision maker may stick to the default even if it is dominated – capturing the phenomenon of choice procrastination in the presence of difficult choices. We show that the prevalence of difficult-choice situations in equilibrium is related to the magnitude of the choice procrastination effect. In general, features of the choice procedure that are typically viewed as biases tend to “protect” the decision maker, in the sense that they encourage competitors to offer higher-value alternatives in equilibrium. We discuss the potential implications of this analysis for recent discussions of “default architecture”.

MSC:

91B06

Decision theory

Keywords:

trade-off avoidance; competition; choice complexity; default bias; behavioral industrial organization; multi-attribute products

References:

[1]	Anderson, C. J., The psychology of doing nothing: forms of decision avoidance result from reason and emotion, Psychol. Bull., 129, 139-167 (2003)
[2]	Bachi, B., Competition with price similarities, Econ. Theory Bull., 277-290 (2016)
[3]	Beshears, J.; Choi, J. J.; Laibson, D.; Madrian, B. C., Simplification and saving, J. Econ. Behav. Organ., 95, 130-145 (2013)
[4]	Bewley, T., Knightian Uncertainty Theory: Part I (1986), Cowles Foundation Discussion Paper No. 807
[5]	Bordalo, P.; Gennaioli, N.; Shleifer, A., Salience and asset prices, Am. Econ. Rev. Pap. Proc., 103, 623-628 (2013)
[6]	Bordalo, P.; Gennaioli, N.; Shleifer, A., Salience and consumer choice, J. Polit. Economy, 121, 803-843 (2013)
[7]	Carroll, G. D.; Choi, J. J.; Laibson, D.; Madrian, B. C.; Metrick, A., Optimal defaults and active decisions, Quart. J. Econ., 124, 1639-1674 (2009)
[8]	Carlin, B. I., Strategic price complexity in retail financial markets, J. Finan. Econ., 91, 278-287 (2009)
[9]	Chioveanu, I.; Zhou, J., Price competition with consumer confusion, Manage. Sci., 59, 2450-2469 (2013)
[10]	Dean, M. (2008): Status Quo Bias in Large and Small Choice Sets, Mimeo, NYU.; Dean, M. (2008): Status Quo Bias in Large and Small Choice Sets, Mimeo, NYU.
[11]	Ericson, K.M., 2016. When Consumers Do Not Make an Active Decision: Dynamic Default Rules and their Equilibrium Effects. Mimeo, Boston University.; Ericson, K.M., 2016. When Consumers Do Not Make an Active Decision: Dynamic Default Rules and their Equilibrium Effects. Mimeo, Boston University.
[12]	Farrell, J.; Klemperer, P., Coordination and lock-in: competition with switching costs and network effects, (Handbook of Industrial Organization, vol. 3 (2007)), 1967-2072
[13]	Gabaix, X.; Laibson, D., Shrouded attributes, consumer myopia, and information suppression in competitive markets, Quart. J. Econ., 121, 505-540 (2006) · Zbl 1179.91124
[14]	Iyengar, S. S.; Huberman, G.; Jiang, W., How much choice is too much: determinants of individual contributions in 401 K retirement plans, (Mitchell, O. S.; Utkus, S., Pension Design and Structure: New Lessons from Behavioral Finance (2004), Oxford University Press: Oxford University Press Oxford), 83-95
[15]	Kőszegi, B.; Szeidl, A., A model of focusing in economic choice, Quart. J. Econ., 128, 53-104 (2013) · Zbl 1400.91136
[16]	Kreps, D., Notes on the Theory of Choice (1988), Westview Press
[17]	Luce, M. F.; Payne, J. W.; Bettman, J. R., Emotional trade-off difficulty and choice, J. Marketing Res., 36, 143-159 (1999)
[18]	Madrian, B. C.; Shea, D. F., The power of suggestion: inertia in 401 (k) participation and savings behavior, Quart. J. Econ., 116, 1149-1187 (2001) · Zbl 0989.91547
[19]	Manzini, P.; Mariotti, M., Sequentially rationalizable choice, Amer. Econ. Rev., 97, 1824-1839 (2007)
[20]	Manzini, P.; Mariotti, M., Stochastic choice and consideration sets, Econometrica, 82, 1153-1176 (2014) · Zbl 1419.91227
[21]	Masatlioglu, Y.; Ok, E., Rational choice with status quo bias, J. Econ. Theory, 121, 1-29 (2005) · Zbl 1098.91036
[22]	Masatlioglu, Y.; Ok, E., A canonical model of choice with initial endowments, Rev. Econ. Stud., 81, 851-883 (2014) · Zbl 1405.91122
[23]	Ok, E., Utility representation of an incomplete preference relation, J. Econ. Theory, 104, 429-449 (2002) · Zbl 1015.91021
[24]	Payne, J. W.; Bettman, J. R.; Johnson, E. J., The Adaptive Decision Maker (1993), Cambridge University Press
[25]	Papi, M., Non-compensatory consideration and compensatory choice: an application to Stackelberg competition, Econ. Theory Bull., 2, 53-63 (2014)
[26]	Papi, M., 2014b. Firm Competition with Tradeoff-Avoiding Consumers. Mimeo.; Papi, M., 2014b. Firm Competition with Tradeoff-Avoiding Consumers. Mimeo.
[27]	Piccione, M.; Spiegler, R., Price competition under limited comparability, Quart. J. Econ., 127, 97-135 (2012) · Zbl 1400.91199
[28]	Riella, G.; Teper, R., Probabilistic dominance and status quo bias, Games Econ. Behav., 87, 288-304 (2014) · Zbl 1302.91066
[29]	Rubinstein, A., Similarity and decision-making under risk (is there a utility theory resolution to the Allais paradox?), J. Econ. Theory, 46, 145-153 (1988) · Zbl 0651.90006
[30]	Spiegler, R., Competition over agents with boundedly rational expectations, Theoretical Econ., 1, 207-231 (2006)
[31]	Spiegler, R., Bounded Rationality and Industrial Organization (2011), Oxford University Press: Oxford University Press New York
[32]	Spiegler, R., Competitive framing, Amer. Econ. J.: Microecon., 6, 35-58 (2015)
[33]	Spiegler, R., On the equilibrium effects of nudging, J. Legal Stud., 44, 389-416 (2015)
[34]	Spiegler, R., Behavioral Economics and the Atheoretical Style (2017), CEPR Discussion Paper 11786
[35]	Szentes, B.; Rosenthal, R., Beyond chopsticks: symmetric equilibria in majority auction games, Games Econ. Behav., 45, 278-295 (2003) · Zbl 1069.91038
[36]	Thaler, R. H.; Sunstein, C. R., Nudge: Improving Decisions about Health, Wealth, and Happiness (2008), Yale University Press
[37]	Tversky, A., Elimination by aspects: a theory of choice, Psychol. Rev., 79, 281-299 (1972)
[38]	Varian, H. R., A model of sales, Amer. Econ. Rev., 70, 651-659 (1980)