Thursday, July 5, 2012

Paper: "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets"

JC Penney (JCP) has been in the news a lot regarding their new "simple" pricing model - which doesn't seem to be working well. (Apparently, it led to one of the fastest revenue declines ever for a department store. An article talks about why this might be the case:

"Gabaix and co-author David Laibson wrote a brilliant (if depressing) paper on shrouding and 'information suppression' that should be required reading for all consumers and executives considering a harebrained new pricing strategy."
The paper mentioned in the article above is "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets". Choice quote:
"We show that debiased consumers prefer to give their business to firms with high shrouded prices because these sophisticated consumers end up with a cross-subsidy from myopic customers [...for example, the] 'educated' customer, [anticipates] all of the marked up add-ons and therefore avoids buying them (e.g., she eats before arriving at the hotel, she brings a cell phone instead of relying on the hotel phone, etc.). The educated consumer substitutes away from the add-ons while reaping the benefits of the loss-leader room charge."
So, it's best to be a customer of a firm that has dumb customers, who subsidize you.

No comments: