Semantron 23 Summer 2023


where a range of fixed, discounted, and very similar options is readily available, and fully displayed to the consumer. Focusing thinkers place most weight on the most variant attribute within the bundle of options (be that price or expected quality of good, etc.), while relative thinkers place greatest weight on the least variant attribute. Wisson shows that relative thinkers can be tilted towards the purchase of more expensive goods through the use of a decoy good, which raises their anchored expectations, and makes medium price options appear more attractive, despite this being contrary to consumers’ initial preferences; this is called a decoy effect. Focusing thinkers do this naturally by focusing on the range of options, and in turn anchoring their expectations by extremes of ranges, and so will be more inclined to purchase more expensive goods, even if these consumers’ valuation is predominantly based on pricing outliers. Similarly, it has been found that the use of a high-low skimming pricing strategy can effectively be used by firms to maximize profits based on consumers’ use of the anchoring bias. 10 By setting an infeasibly and unreflectively high price for a good, and then aggressively discounting it with a provided reference point, firms can anchor consumers’ expectations of the good’s value, and in turn, when the good reaches a first-degree price discrimination limit, demand for the good is increased, despite this again not reflecting consumers unobstructed preferences. Another study similarly found that limited memory customers, who were solely able to attribute whether they considered a good under or overpriced, in a duopolistic market (again think supermarket-style), after considering a valuation of the first good, would not consider the second if the first was below their valuation, 11 in turn contributing to a competition failure. Moreover, in practice, given consumer use of the default bias and social norms in decisions about spending, agents have no reason to deviate from the default norm preference, provided that it sits below their valuation. This case is particularly resonant in a supermarket-style setting where major firms can dominate, as their products are generally below the consumer valuation due to economies of scale, which lowers production costs below market equilibrium prices, and in turn increases their sales, further fuelling their commanding market share. The wider implications of all these findings are serious when considering competition and fairness within markets. As a result of consumer use of heuristics, already large firms are able to gain enormous market shares and develop oligopolies, either stunting market growth due lack of incentive for R&D spending, or expand and dominate other fields, 12 as with large user interface tech corporations (e.g. Meta, Apple, etc.) and AI. Further, and perhaps more significantly, it affords firms to lead unwitting consumers to pay prices far above market equilibrium and incur additional costs which they may not be able to afford. Whether or not this is ethical, and whether consumers should be protected from this psychological manipulation remains to be seen. However, it is certainly detrimental to them, and presents perhaps the largest downside to the use of heuristics by consumers.

10 Hu, Z., Chen, X., & Hu, P. (2016). Technical Note — Dynamic Pricing with Gain-Seeking Reference Price Effects . Operations Research, 64(1), 150 – 157. 11 Kutlu, L. (2015). Limited Memory Consumers and Price Dispersion. Review of Industrial Organization , 46(4), 349 – 357. 12 No given author. (2022, January 22). Big tech’s private passions. The Economist. What America’s largest technology firms are investing in | The Economist.


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