Steering Fallible Consumers

Paul Heidhues, Mats Köster and Botond Koszegi

The Economic Journal, 2023, vol. 133, issue 652, 1430-1465

Abstract: Online intermediaries with information about a consumer’s tendencies often ‘steer’ her toward products she is more likely to purchase. We analyse the welfare implications of this practice for ‘fallible’ consumers, who make statistical and strategic mistakes in evaluating offers. The welfare effects depend on the nature and quality of the intermediary’s information and on properties of the consumer’s mistakes. In particular, steering based on high-quality information about the consumer’s mistakes is typically harmful, sometimes extremely so. We argue that much real-life steering is of this type, raising the scope for a broader regulation of steering practices.

Date: 2023
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