A comparison of different contract forms for consumers with switching costs and changed preferences

This paper compares three contract forms, including short-term contract with price discrimination, short-term contract without price discrimination, and long-term contract with price commitment for consumers with switching costs and changed preferences. We find that long-term contract generates the largest profit for firms. Moreover, we find that switching costs make the market more competitive when consumers have changed preferences, and the higher the switching costs, the more competitive. Our theory combines linear-city duopoly and switching-cost model and the results are consistent with literature, for example price commitment is valuable. Our findings shed light on the practice of different forms of dynamic pricing in various industries including telecommunication industry and airline industry.     

Risk-neutral firms can extract unbounded profits from consumers with prospect theory preferences

This paper considers the problem of a risk-neutral firm offering a gamble to consumers with preferences given by prospect theory. Under conditions satisfied by virtually all functional forms used in the literature, firms can extract arbitrarily high expected values from consumers. Moreover, for any given lottery, there exists another lottery that makes both the firm and the consumer better off. As a consequence, equilibria and Pareto optimal allocations do not exist in standard monopolistic or competitive models.     

Strategic take-back programs when consumers have heterogeneous environmental preferences

We look at the strategic introduction of take-back programs (TBPs) which offer consumers a discount on their next purchase (reward) when they drop off previous purchases. In a Hotelling duopoly, consumers are heterogeneous not only in terms of their location on the Hotelling line but also in terms of their recycling preferences. Firms introduce TBPs to obtain a market share advantage (reward effect) and/or to recover the intrinsic value of the recycled units (recycling effect); their choice of the optimal reward balances these two effects: for instance, a firm might be willing to introduce a TBP, even if this means losing money on each recycled unit, in order to prevent the competitor from gaining a too large market share advantage. Comparing the level of TBP uptake at the market equilibrium to the one that maximizes social welfare, we show that a lower or higher TBP uptake can be socially desirable, depending, among other, on the weight that is given to the environmental benefits of TBPs. Several extended producer responsibility policies are discussed in terms of their potential to encourage TBP uptake and their overall impact on social welfare.     

Comparing consumers’ preferences and willingness to pay for non-GM oil using a contingent valuation approach

A contingent valuation method is used in this paper to compare Chinese and Japanese consumers’ preferences and willingness to pay for non-GM vegetable oil. An often ignored issue—the scale factor in a discrete choice model—is explicitly considered, and parameter equality for different data sets is formally tested before reaching a conclusion. Results indicate that in these two countries consumers’ attitude factors and demographic traits have significantly different effects on their purchase intentions, and on average, Japanese consumers are willing to pay a much higher premium for non-GM vegetable oil than Chinese consumers.      

Too poor to be green consumers? A field experiment on revealed preferences for firewood in rural Guatemala

The paper reports on a field experiment that investigates whether households in Guatemala are willing to surrender a small material gain in order to buy legal rather than illegal firewood. Given the ineffectiveness of command-and-control policies to curb the problem of illegal logging in Guatemala, the experiment assesses the potential viability of market-oriented solutions. Local consumers in developing countries are generally believed to be too poor to pay a premium for green/ethical products. Therefore, little information has been gathered on willingness-to-pay (WTP) for such products and its determinants in non-affluent consumer markets. While our experiment on firewood consumption in central Guatemala only implies a weak and indirect test of WTP for green products, the results indicate that it is premature, if not unwarranted, to assume that the poor are not ready to make pro-ethical choices in the marketplace. Moreover, we find that information on the legal procedures for firewood extraction significantly affects consumer choice between legal and illegal firewood.     

Optimal growth with many consumers

A method is described for constructing all Pareto-optimal allocations for a dynamic economy with many heterogeneous consumers, under certainty, in which both the technology and consumer preferences are recursive but preferences need not be additively separable over time. Optimal (perfect foresight competitive equilibrium) allocations are obtained through the study of a dynamic program. For an economy with one consumption good, sufficient conditions are given for the existence of a unique interior stationary distribution of consumption and wealth. For a two-person exchange economy, sufficient conditions are given for the global asymptotic stability of the unique interior stationary point.     

Ricardian equivalence with uninformed consumers?

Empirical studies have shown that the majority of people are poorly informed about the size of government debts and deficits. This paper investigates whether it is nevertheless possible for households to mimic Ricardian behavior on the basis of those variables that they actually observe. In a simple two-period model, it is shown that imperfect information about government debt can lead to departures from Ricardian equivalence even if the households' estimates of debt are unbiased. The paper discusses why households face difficulties in obtaining relevant information about government debt.     

Testing revealed preferences for homotheticity with two-good experiments

It is shown that for two dimensional commodity spaces any homothetic utility function that rationalizes each pair of observations in a set of consumption data also rationalizes the entire set. The result is used to provide a simplified nonparametric test for homotheticity of demand and a measure for homothetic efficiency. The article thus provides a useful tool to screen data for severe violations of homotheticity before estimating parameters of homothetic utility functions. The new test and measure are applied to previously published data.     

Evaluating trade reform with many consumers

In this paper we look at the welfare effects of trade reform in the many-consumers case. We show that Pareto-improving reforms with lump-sum taxation or with non-lump-sum taxation are possible in the small country case if sufficient conditions for welfare to rise in the single-consumer case are met. JEL Classification: F0, F1
Evaluation d'une réforme de la politique commerciale quand il y a plusieurs consommateurs. Les auteurs examinent les effets de bien-être d'une réforme de la politique commerciale quand il y a plusieurs consommateurs. On montre que des réformes améliorant la situation au sens de Pareto sont possibles grâce à des taxes forfaitaires ou non forfaitaires dans le cas de petits pays si on satisfait les conditions nécessaires pour une amélioration du niveau de bien-être dans le cas d'un seul consommateur.     

Economies with price-dependent preferences

With the exception of existence, not much is known of economies where individual preferences may depend on prices. We show that the main properties of competitive equilibria that fall under the general heading of qualitative comparative statics remain true when preferences are price-dependent, provided that the total resources are allowed to vary in the parameter space. The equilibrium set is a smooth manifold diffeomorphic to a Euclidean space; the natural projection is a smooth proper map, with topological degree one; equilibria always exist, and are locally unique for an open and dense set of economies.     

Bargaining with history-dependent preferences

Two impatient players bargain over a pie of size one according to the infinite alternating-offers procedure. Players’ payoffs depend not only on the outcome but also on the process of the bargaining. Specifically, they prefer impasse to any agreement that gives them lower discounted utility than would have been derived from accepting earlier offers. We characterize the essentially unique subgame perfect equilibrium path, which consists of gradual concessions. The more patient players are, the longer it takes them to reach an agreement. When players become infinitely patient, the efficiency loss is substantial, yet the equilibrium division converges to the Nash solution.     

Herding with collective preferences

This paper studies a simple model of observational learning where agents care not only about the information of others but also about their actions. We show that despite complex strategic considerations that arise from forward-looking incentives, herd behavior can arise in equilibrium. The model encompasses applications such as sequential elections, public good contributions, and leadership charitable giving.     

The market for preferences

Learning processes are widely held to be the mechanism by whichboundedly rational agents adapt to environmental changes. Weargue that this same outcome might also be achieved by a differentmechanism, namely specialisation and the division of knowledge,which we here extend to the consumer side of the economy. Wedistinguish between high-level preferences and low-level preferencesas nested systems of rules used to solve particular choice problems.We argue that agents, while sovereign in high-level preferences,may often find it expedient to acquire, in a pseudo-market,the low-level preferences in order to make good choices whenpurchasing complex commodities about which they have littleor no experience. A market for preferences arises when environmentalcomplexity overwhelms learning possibilities and leads agentsto make use of other people's specialised knowledge and decisionrules.     

Waves in consumption with interdependence among consumers

Abstract. In this paper we model the development of consumption when there are interactions between consumers. The consumer recognizes three reference groups: peer, distinction, and aspiration. The interplay of aspiration and distinction can lead to ‘waves’ in consumption; for example, the avant‐garde consumption of up‐market pioneers is copied by other types of consumer. As the latter aspire to emulate the former, the former seek distinction by varying their consumption. A consumption activity may start up market, then gradually descend the social spectrum. More complex patterns with continuing cycles in consumption can also be found. JEL classification D11,D62     

Market design with endogenous preferences

This paper explores the interdependence between market structure and an important class of cognitive biases. Starting with a familiar bilateral monopoly framework, we characterize the endogenous emergence of preference distortions during bargaining which cause negotiators to perceive their private valuations differently than they would outside the adversarial negotiation context. Using this model, we then demonstrate how a number of external interventions in the structure and/or organization of market interactions (occurring before trade, after trade, or during negotiations themselves) can profoundly alter the nature of these dispositions. Our results demonstrate that many such interventions frequently (though not always) share qualitatively similar characteristics to market interventions that are often proposed for overcoming more conventional forms of market failure. Nevertheless, our analysis underscores the importance of understanding the precise link between cognitive failures and market structure prior to the implementation of any particular proposed reform.     

Repeated games with present-biased preferences

We study infinitely repeated games with perfect monitoring, where players have β-δ preferences. We compute the continuation payoff set using recursive techniques and then characterize equilibrium payoffs. We then explore the cost of the present-time bias, producing comparative statics. Unless the minimax outcome is a Nash equilibrium of the stage game, the equilibrium payoff set is not monotonic in β or δ. Finally, we show how the equilibrium payoff set is contained in that of a repeated game with smaller discount factor.     

Nonlinear pricing with self-control preferences

A basic assumption of economics is that consumers choose what they want. However, many consumers find it difficult to stop overeating, overspending, smoking, procrastinating, etc, even though they want to. In reality, consumers have temptation and it is psychologically costly to exercise self-control. To clarify the implications of the existence of temptation and self-control costs, this paper studies a firm's optimal selling strategy exploiting the behavioral features of consumers. We characterize optimal nonlinear pricing schemes for a monopoly when self-control is costly for consumers. Since consumers have a preference for commitment, the firm faces a trade-off between offering a small menu that makes the consumers’ self-control easier and offering a large menu that achieves better price discrimination. We show that the optimal menu resembles the one in the standard nonlinear pricing problem with a price ceiling, where the upper bound on prices is determined endogenously by a participation constraint. The ceiling motivates the firm to offer a relatively flat and compact price schedule, serving more consumers with low demand. The characterization also shows that the firm may earn less if consumers have temptation.     

Increasing risk with state-dependent preferences

A definition of increasing risk for state-dependent preferences is introduced and its usefulness for the analysis of concrete economic problems is illustrated. For classes of individuals with the same reference set the notion of increasing risk has three equivalent characterizations analogous to those obtained in the case of state-independent preferences. The definition is used to conduct a comparative statics analysis of a portfolio problem with state-dependent preferences.     

Distributive politics with other-regarding preferences

This paper analyzes a nonsmooth model of probabilistic voting with two parties and a broad family of other-regarding behavior, including fairness and quasi-maximin preferences, income-dependent altruism, and inequity aversion. The paper provides conditions for equilibrium existence and uniqueness. It also characterizes the Nash equilibrium in pure strategies when parties hold either symmetric payoffs, or minor forms of asymmetries. The characterization shows that the two parties converge to an equilibrium policy that maximizes a mixture of a “self-regarding utilitarian” social welfare function and an aggregate of society's other-regarding preferences. These results are shown to be applicable to other nonsmooth frameworks, such as probabilistic voting with loss averse voters. The characterization also shows that the direction and the size of the inefficiencies emerging from electoral competition depend in a subtle way on the nature of the other-regarding preferences (and resp., loss aversion).