Research

Research Statements

• Brief Research Statement

• Extended Research Statement

Research Papers

"The Illusion of Competition", with Ryan Westphal

• Abstract: Existing models of price competition in the presence of endogenous consumer search restrict attention to single-brand firms, ensuring that any consumer who receives multiple price quotes places firms in competition with each other. We extend these models to allow a single firm to own two brands, meaning that a consumer who receives exactly two price quotes may receive two from the same firm, and hence be "captive" to that firm. If there are sufficiently many such consumers and there are initially three single-brand firms, requiring two merging firms to consolidate their brands rather than operate them separately would increase competition and benefit consumers. This is also true if consumers operate under an ``illusion of competition'' in which they are unaware that separate brands may be co-owned by the same firm, believing them all to be independent competitors. Breaking such an illusion of competition by advertising the brand ownership structure may help or hurt consumers.

"Sending out an SMS: Automatic Enrolment Experiments for Overdraft Alerts", with Darragh Kelly, Jeroen Nieboer, Matthew Osborne, and Jonathan Shaw. Journal of Finance forthcoming.

"Time to act: A field experiment on overdraft alerts", with Paul Adams, Darragh Kelly, Jeroen Nieboer, and Matthew Osborne. 

FCA Occasional Paper No. 40, 2018. 

"Sending out an SMS: The impact of automatically enrolling consumers into overdraft alerts", with Andrea Caflisch, Darragh Kelly, Jeroen Nieboer, and Matthew Osborne. 

FCA Occasional Paper No. 36, 2018. 

• Abstract: Unarranged overdraft, unpaid item, and other incidental charges cost UK current account holders £1.2 billion in 2014. A recent policy initiative required UK retail banks to enroll customers automatically into unarranged overdraft and unpaid item alerts by February 2018. Although such alerts have been available to customers of all major UK retail banks since at least 2012, only 3-8% had actively registered for them as of December 2016. Using a sample including 150,000 effected customers, we study a large-scale staggered rollout of automatic enrollment into alerts carried out by two major UK retail banks and find large reductions in charges: Automatic enrollment into unpaid item alerts (that inform customers of retry periods) reduces charges by 21-24%. Automatic enrollment into unarranged overdraft alerts reduces charges by 25%. Over 90% of customers rarely incur fees, and alerts reduce their charges by as much as 50%. Less than 10% of customers are heavy users and they still incur the majority of their charges after automatic enrollment.

"Peaches, Lemons, and Cookies: Designing Auction Markets with Dispersed Information", with Susan Athey, Ittai Abraham, Moshe Babaioff 

Games and Economic Behavior, 2020, 124, 454-477. doi:10.1016/j.geb.2020.09.004.

• Download Online Appendix here. 

• Abstract: We study the effect of ex-ante information asymmetries on revenue in common-value second-price auctions (SPA). The motivating application of our results is to online advertising auctions in the presence of "cookies," which allow individual advertisers to recognize advertising opportunities (impressions) for users who, for example, are existing customers. Cookies create substantial information asymmetries both ex ante and at the interim stage, when advertisers form their beliefs. We distinguish information structures in which cookies identify "lemons" (low value impressions) from those in which cookies identify "peaches" (high value impressions). To make progress in a setting with multiple Nash equilibria, we first introduce a new refinement, "tremble robust equilibrium" (TRE). We then characterize the unique TRE in both first and second-price common-value auctions with two bidders who each receive binary signals. This generates two novel insights. First, common-value second-price auction revenues are vulnerable to ex ante asymmetry if relatively rare cookies identify lemons, but not if they identify peaches. Second, first-price auction revenues are substantially higher than second-price auction revenues under the same conditions. Two extensions show that these insights are robust in settings with more than two bidders and richer signal structures. Finally, we consider revenue maximization in a richer setting with a private component to valuations.

"Overconfident Consumers in the Marketplace" 

Journal of Economic Perspectives, 2015, 29(4), 9-36. doi:10.1257/jep.29.4.9.

• Abstract: The term overconfidence is used broadly in the psychology literature, referring to both overoptimism and overprecision. Overoptimistic individuals overestimate their own abilities or prospects. In contrast, overprecise individuals place overly narrow confidence intervals around forecasts, thereby underestimating uncertainty. These biases can lead consumers to misforecast their future product usage, or to overestimate their abilities to navigate contract terms. In consequence, consumer overconfidence causes consumers to systematically misweight different dimensions of product quality and price. Poor choices based on biased estimates of a product's expected costs or benefits are the result. For instance, overoptimism about self-control is a leading explanation for why individuals overpay for gym memberships that they underutilize. Similarly, overprecision is a leading explanation for why individuals systematically choose the wrong calling plans, racking up large overage charges for exceeding usage allowances in the process. Beyond these market effects of overconfidence, this paper addresses three additional questions: What will firms do to exploit consumer overconfidence? What are the equilibrium welfare consequences of consumer overconfidence for consumers, firms, and society? And what are the implications of consumer overconfidence for public policy?

• For the rest of the symposium on overconfident consumers, overconfident managers, and overconfident investors, visit here.

"Failing to Choose the Best Price: Theory, Evidence, and Policy" 

Review of Industrial Organization, 47(3), 303–340. doi:10.1007/s11151-015-9476-x. 

• Pre-publication version available without paywall here, or published version available at Sci-Hub (explained here) by solving a captcha here.

• Abstract: Both the "law of one price" and Bertrand's (1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and/or show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons difficult and soften competition. Possible regulatory interventions include: simplifying the choice environment, for instance by restricting price to be a scalar; advising consumers of their expected costs under each option; or choosing on behalf of consumers.

"Behavioral Consumers in Industrial Organization: An Overview" 

Review of Industrial Organization, 2015, 47(3), 247–258. doi:10.1007/s11151-015-9477-9.

• Pre-publication version available without paywall here, or published version available at Sci-Hub (explained here) by solving a captcha here.

• Abstract: This paper overviews three primary branches of the industrial organization literature with behavioral consumers. The literature is organized according to whether consumers: (1) have non-standard preferences; (2) are overconfident or otherwise biased such that they systematically misweight different dimensions of price and other product attributes; or (3) fail to choose the best price due to suboptimal search, confusion comparing prices, or excessive inertia. The importance of consumer heterogeneity and equilibrium effects are also highlighted along with recent empirical work.

"Selling to Loss Averse Consumers: A Survey" (2015)

• Abstract: A small applied theory literature examining the e ect of consumer loss aversion on equilibrium pricing has developed. I briefly survey this work, covering work on focal pricing, randomized pricing, insurance, flat-rate bias, price discrimination, nonlinear pricing, and expectations management. I finish by discussing evidence, challenges for the literature, and open questions.

"Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock", with Matthew Osborne 

American Economic Review, 2015, 105(1), pp. 234-271. doi:10.1257/aer.20120283. 

• Download Web Appendix from AEAweb here.

• Abstract: Following FCC pressure to end bill shock, cellular carriers now alert customers when they exceed usage allowances. We estimate a model of plan choice, usage, and learning using a 2002-2004 panel of cellular bills. Accounting for firm price adjustment, we predict that implementing alerts in 2002-2004 would have lowered average annual consumer welfare by $33. We show that consumers are inattentive to past usage, meaning that bill-shock alerts are informative. Additionally, our estimates imply that consumers are overconfident, underestimating the variance of future calling. Overconfidence costs consumers $76 annually at 2002-2004 prices. Absent overconfidence, alerts would have little to no effect.

"Consumer Inattention and Bill-Shock Regulation" 

Review of Economic Studies 2015, 82(1), 219-257. doi:10.1093/restud/rdu024. 

• Download Online Appendix here. Previous 2012 version available from SSRN here, with previous Online Appendix here. An earlier version of this paper circulated under the title "Bill Shock: Inattention and Price-Posting Regulation" 

• Abstract: For many goods and services such as electricity, health care, cellular phone service, debit-card transactions, or those sold with loyalty discounts, the price of the next unit of service depends on past usage. As a result, consumers who are inattentive to their past usage but are aware of contract terms may remain uncertain about the price of the next unit. I develop a model of inattentive consumption, derive equilibrium pricing when consumers are inattentive, and evaluate bill-shock regulation requiring firms to disclose information that substitutes for attention. When inattentive consumers are sophisticated but heterogeneous in their expected demand, bill-shock regulation reduces social welfare in fairly-competitive markets, which may be the effect of the Federal Communication Commission's recent bill-shock agreement. If some consumers are attentive while others naively fail to anticipate their own inattention, however, then bill-shock regulation increases social welfare and can benefit consumers. Hence, requiring zero-balance alerts in addition to the Federal Reserve's new opt-in rule for debit-card overdraft protection may benefit consumers.

"Dynamic Nonlinear Pricing: biased expectations, inattention, and bill shock" 

International Journal of Industrial Organization, 2012, 30(3), pp. 287-290. doi:10.1016/j.ijindorg.2011.12.007. 

• Pre-publication version available without paywall here, or published version available at Sci-Hub (explained here) by solving a captcha here.

• Abstract: Recent research highlights the importance of biased expectations and inattention for nonlinear pricing in dynamic environments. Findings are: (1) Three-part tariffs, such as cellular service contracts, exploit consumer overconfidence. (2) Surprise penalty fees may be used to further exploit biased beliefs or alternatively to price discriminate more efficiently whenever consumers are inattentive. (3) Implementing the recent bill-shock agreement between cellular carriers and the FCC is predicted to harm rather than help consumers when endogenous price changes are taken into account.

"Developing a Reputation for Reticence" 

Journal of Economics & Management Strategy, 2011, 20(1), pp. 225-268. doi:10.1111/j.1530-9134.2010.00288.x. 

• Pre-publication version available without paywall here, or published version available at Sci-Hub (explained here) by solving a captcha here.

• Abstract: A sender who has disclosable information with probability less than one may partially conceal bad news by choosing to withhold information and pooling with uninformed types. The success of this strategy depends on receivers' beliefs about the probability that the sender has disclosable news. In a dynamic context, informed senders try to cultivate a reputation for reticence either by concealing good news along with the bad, or by concealing some good news and disclosing some bad news. A reputation for reticence is valuable because it makes receivers less skeptical of past or future non-disclosures. The model provides insight into the choice by firms such as Google not to disclose quarterly earnings guidance to analysts, as well as Tony Blair's reticence over his son's vaccine record during the MMR scare in the UK.

"Selling to Overconfident Consumers" 

American Economic Review, 2009, 99(5), pp. 1770-1807. doi:10.1257/aer.99.5.1770. 

• Download Web Appendix from AEAweb here.

• Abstract: Consumers may overestimate the precision of their demand forecasts. This overconfidence creates an incentive for both monopolists and competitive firms to offer tariffs with included quantities at zero marginal cost, followed by steep marginal charges. This matches observed cell-phone service pricing plans in the US and elsewhere. An alternative explanation with common priors can be ruled out in favor of overconfidence based on observed customer usage patterns for a major US wireless phone service provider. The model can be reinterpreted to explain the use of flat rates and late fees in rental markets, and teaser rates on loans. Nevertheless, firms may benefit from consumers losing their overconfidence.

• The 2008 working paper version is available from SSRN here as well as from my website here. Download 2008 web appendix here.

"Who Benefits from Tax-Advantaged Employee Benefits?: Evidence from Parking", with Paul Oyer 

NBER Working Paper No. W14062. doi:10.3386/w14062. 

• Copy available from NBER here.

• Abstract: We use university parking permits to study how firms and employees split the value of employee benefit tax subsidies. Starting in 1998, the IRS allowed employees to pay for parking passes with pre-tax income. This subsidized the parking pass purchases of faculty and staff, but did not affect students. We show that the typical university raised its parking rates by 8-10% extra when it implemented a pre-tax payment system, but that this increase was the same for those affected by the tax change and those that were not affected. We conclude that university employees captured much of the new tax benefit, that faculty and staff that purchase permits benefited relative to those that do not purchase permits, and that students that purchase permits were made worse off relative to those that do not buy permits.