APPROXIMATION IN COMPLEX PRICING MECHANISMS
Mechanism design theory shows that simpler pricing strategies can closely approximate the profits of more complex pricing mechanisms. But these simpler strategies are highly sensitive to the firm’s knowledge of the distribution of demand for each good. We use an economic lab experiment to explore how well simpler pricing strategies approximate the profit maximizing mechanism when gaps exist in firm knowledge regarding the demand for goods and the correlation between consumers’ reservation values for goods.
Collaborators: Peter Slade (University of Saskatchewan) and Steve Wu (Purdue University)
Funding: Canadian Social Sciences and Humanities Research Council (SSHRC)
COMPLEX PRICING AND CONSUMER BEHAVIOR
Multi-product firms are increasingly engaged in the targeting of consumers using complex pricing mechanisms. However, many of these mechanisms do not account for how real consumers may struggle to fully optimize when faced with complex prices. We conduct an economic lab experiment to explore how consumers may fall short of optimal decision-making under increasingly complex pricing. We also show how firms might account for sub-optimal consumer choices in choosing a more streamlined pricing strategy.
Collaborators: Joshua Deutschmann (University of Wisconsin) and Emilia Tjernström (University of Wisconsin)
Funding: National Science Foundation
SOCIAL NORMS: CLASSIFICATION AND ENFORCEMENT
Human behavior can be motivated by social norms even if breach does not warrant consequences. There are very different approaches how to define what a social norm is. We use an economic lab experiment to compare two particular approaches that try to construct social norms from simple first and second order beliefs. This comparison will shed light on the question whether normativity is actually a prerequisite form social norms to motivate behavior.
Collaborators: Gillian Hadfield (University of Toronto)
DYNAMIC FIRM LOCATION IN TWO-DIMENSIONAL SPACE
Two-dimensional extensions of Hotelling's location game show that spatial competition leads to maximum differentiation in one dimensions and minimum differentiation in the other. We allow for endogenous entry into the market and find that competition may lead to the min/max finding but also may lead to maximum differentiation in both dimensions. The critical issue in determining the degree of differentiation is if existing firms are seeking to deter new entry or maximizing profits within an existing, stable market.
Collaborators: Seong D. Yun (Mississippi State University) and Benjamin Gramig (University of Illinois)