Bait and Ditch: Consumer Naiveté and Salesforce Incentives

Fabian Herweg () and Antonio Rosato

No 12612, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze a model of price competition between a transparent retailer and a deceptive one in a market where a fraction of consumers is naive. The transparent retailer is an independent shop managed by its owner. The deceptive retailer belongs to a chain and is operated by a manager. The retailers sell an identical base product, but the deceptive one also offers an add-on. Rational consumers never consider buying the add-on, yet naive ones can be talked into buying it. By offering its store manager a contract that pushes him to never sell the base good without the add-on, the chain can induce an equilibrium in which both retailers obtain more-than-competitive profits. The equilibrium features market segmentation with the deceptive retailer targeting only naive consumers whereas the transparent retailer serves only rational ones. Welfare is not monotone in the fraction of naive consumers in the market. Hence, policy interventions designed to de-bias naive consumers might backfire.

Keywords: Add-on pricing; Bait and switch; Consumer naiveté; Incentive contracts (search for similar items in EconPapers)
JEL-codes: D03 D18 D21 L13 M52 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-com, nep-cta, nep-mic and nep-mkt
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