Signals Sell: Product Lines when Consumers Differ Both in Taste for Quality and Image Concern

This paper analyzes optimal product lines when consumers differ both in their taste for quality and in their desire for social image. The market outcome features partial pooling and product differentiation that is not driven by heterogeneous valuations for quality but by image concerns. A typical monopoly outcome is a two-tier product line resembling a "masstige" strategy as observed in luxury goods markets. Products can have identical quality and differ only in price and image, thereby rationalizing quality-equivalent line extensions. Under competition, both average quality and market coverage are (weakly) higher but monopoly can yield higher welfare than competition

Signals sell: Designing a product line when consumers have social image concerns

One important function of consumption is for consumers to show off their taste, virtue or wealth. While empirical observations suggest that producers take this into account, existing research has concentrated on analyzing the demand side. This paper investigates how a monopolist optimally designs its product line when consumers differ both in their taste for quality and their desire for a positive social image. The monopolist distorts qualities and prices to allocate images to consumers. It generically pools consumers with different tastes because high-taste consumers lend a positive image to the product of their choice and thereby increase the product's value to others. Often, average quality is lower than in a market without image concerns and there is underprovision as compared to the welfare-maximizing allocation. Although average quality is higher in a competitive market, welfare typically is not

Essays in Behavioral Public Economics

This dissertation studies how insights from behavioral economics affect the economic analysis of public policy. The thesis consists of four chapters that make use of different methods: laboratory experiments, quasi-experimental and structural econometric methods, as well as theoretical analyses. The first chapter investigates if social image concerns affect the take-up of a redistributive transfer. In a lab experiment, we vary the visibility of the take-up decision and find that subjects are substantially less likely to take up a public transfer. Moreover, we vary whether transfer eligibility is based on ability or luck, and how the transfer is financed. The results show that subjects avoid the inference both of being low-skilled (ability stigma) and of being willing to live off others (free-rider stigma). These results support our predictions from a theoretical model of social image concerns. Using a placebo treatment, in which the take-up is uninformative about the claimant's type, we exclude other explanations for the observed stigma effects. Although stigma reduces take-up, elicitation of political preferences reveals that only a minority of “taxpayers” vote for the public transfer. The second chapter studies if sin taxes on soft drinks and fats are effectively targeting consumers with low self-control. For identification, we exploit upward and downward shifts of the soft drink tax and the fat tax in Denmark. We assess the response in purchases empirically using the GfK Consumerscan household panel. With this data, we can separate the sample in consumers with low and high levels of self-control using a survey measure. We find that consumers with low self-control reduce purchases less strongly than consumers with high self-control when taxes go up, but increase purchases to a similar extent when taxes go down. Hence, we document an asymmetry in the responsiveness to increasing and decreasing prices. We show theoretically that these observations are consistent with a model of self-control and rational habit formation. The results suggest that price instruments may not be an effective tool for targeting self-control problems. The third chapter uses a structural demand model to analyze the impact of soft drink taxes in the presence of habit formation and stockpiling. The model is estimated using nested logit and incorporates unobserved heterogeneity in tastes. The estimated model is used to simulate short-run and long-run price elasticities, as well as the simulated impact of different soft drink taxes. The results show that long-run price elasticities are approximately 20 percent larger than short-run elasticities due to habit formation. Moreover, excise taxes on sugary soft drinks are more effective in reducing sugar consumption than ad valorem taxes and excise taxes that do not distinguish between sugary and diet beverages. The fourth chapter investigates if individuals select information structures in order to protect their motivated beliefs. In a lab experiment, subjects can select the information structure that gives them feedback regarding their rank in the IQ distribution (ego-relevant treatment) or regarding a random number (control treatment). We find that individuals in the ego-relevant treatment select information structures, in which negative feedback is less salient. When receiving such negative feedback with lower salience they update their beliefs less, but only when feedback is ego-relevant. Hence, subjects select information structures that allow them to misinterpret negative feedback in a self-serving way. Moreover, individuals in the ego-relevant feedback choose less informative feedback

Algorithmic Processes And Social Values

In this thesis, we study several problems at the interface of algorithmic decision-making and society, focusing on the tensions that arise between these processes and social values like fairness and privacy. In the first chapter, we examine the design of financial portfolios which adequately serve all segments of the population. In the second, we examine an allocation setting where the allocator wishes to distribute a scarce resource across many groups fairly, but does not know ahead of time which groups have a need for the resource. In the third, we study a game-theoretic model of information aggregation and the effects of individuals acting to preserve the privacy of their personal beliefs on the collective welfare of the population. Finally, we look at some of the issues that arise from the desire to apply automated techniques to problems in redistricting, including fundamental flaws in the definitions and frameworks typically used