Fairness Considerations in Pricing Decisions: Evidence from Shaming Regulation
with Itai Ater
What are the effects of attention to the price paid by other consumers on consumer demand and firms’ pricing decisions? We study the effects of a regulation that required Israeli retailers to display on-the-shelf signs indicating the (cheap) international price of a product alongside the price of that product in the local store. We find that prices of products included in the regulation fell on average by 8%. The price drop was larger for products that were initially more expensive compared to their international price. Following the price drop, quantities sold increased. Yet, these increases were significantly smaller than increases in quantities that we predict based on pre-regulation demand elasticities and the actual price drops. Products that remained relatively expensive vis-á-vis their international price exhibited larger differences between predicted and actual quantities sold. We develop a theoretical model that explains these findings, and estimate it to quantify the importance of salient unfair prices. We find that a 20 percentage-point salient difference between local and international prices is equivalent to a 1% increase in the price of the local product itself. Next, we use the model and its estimated parameters to calculate the impact of the regulation on consumer utility. We find that utility declined for some products included in the regulation. This happens when the disutility from observing that other consumers pay less exceeds the added utility from reduced prices and increased consumption. We discuss potential implications of our findings for optimal pricing strategies, price rigidity, and theoretical models of salient thinking.
Work in Progress
Strategic Reaction to Information Simplification: Evidence from Nutritional Choices
with Oren Reshef
In a world of complex choices, accessible and simpler information can aid consumers in making more informed decisions. Nevertheless, consumers may become too focused on the simplified information and fail to consider other, non-evident but important factors. Firms can respond by offering better products, but may also exploit shifts in consumers’ inattention to strategically manipulate price and product design. We study a nationwide, mandatory informational policy which adds threshold-based front-of-package labels to the detailed nutritional labels on the back of packaged food . We construct unique dataset integrating manually collected nutritional data with national-level prices and sales data. Using difference-in-differences and regression discontinuity, we then identify the effects of the new labeling on consumers’ decision-making, quantities purchased, and pricing and product design strategies. We also obtain micro-level data from a large online grocery retailer and study consumers search behavior and nutritional knowledge. Moreover, we conduct a series of large-scale, randomized control trials in an online shopping environment to separate the mechanisms affecting consumer responses and derive the optimal policy design.
Is Drawing Attention Effective? Evidence from Supermarkets
with Itai Ater
Expenditure on food represents a considerable share of household spending, and policy-makers are considering various means to reduce food prices. In this paper we investigate the effects of information-enhancing initiative in the Israeli retail food market. The initiative involved a monthly comparison of the price of a fixed basket of 68 popular goods sold by Israeli supermarket chains. Using detailed price information and a difference-in-differences research design, we find a drop of 4% in the basket price. The drop in prices is concentrated among publicly-traded retailers, and it rises after media reports on the results of the basket comparison. Overall, our findings suggest that drawing attention to prices could be an effective means by policy makers to foster competition and reduce prices.