ESRI Report on Consumer Decision Making

The ESRI published a report on Friday entitled “An Investigation of Consumers’ Capabilities with Complex Products“. The authors are Pete Lunn, Marek Bohacek, Jason Somerville, Aine Ni Choisdealbha and Féidhlim McGowan. It contains a fascinating range of experimental findings demonstrating the pronounced difficulties experienced by consumers in valuing and making decisions with complex, multi-attribute products.

Below is from the ESRI press release. This has been a long-run research programme and the work is worth wide-spread debate in terms of implications for consumer protection, regulation and related policy areas.

PRICE Lab is a research programme in behavioural economics, jointly funded by the Central Bank of Ireland, the Commission for Communications Regulation, the Commission for Energy Regulation and the Competition and Consumer Protection Commission. The lab uses computerised experiments to study what consumers are capable of and what they are not.

The experiments described in the report systematically tested how accurately consumers could distinguish good deals from bad deals. The results showed that once consumers had to take into account more than two or three factors at the same time, they struggled to spot good deals and often made mistakes.

The findings also revealed systematic biases in consumers’ choices. Across multiple experiments, consumers tended to think that deals closer to the top of the product range were good value while deals closer to the bottom were bad, even when the high-end products were expensive for what they were and the low-end products were good value at the price listed.

The report discusses implications of the results for consumer protection. The findings suggest that consumers can benefit if product ranges and descriptions are kept simple. Where companies instead market products in an unnecessarily complex fashion, with multiple characteristics and price components, consumers will be more likely to make mistakes. In markets where consumers struggle with the volume or complexity of product information, comprehensive, independent price comparison sites can play an important role, by helping consumers to integrate the information or by drawing consumers’ attention to the most important product features.

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10 thoughts on “ESRI Report on Consumer Decision Making”

  1. This is an interesting and exciting piece of work developing and applying these new experimental methods. Full credit to those involved. It is even more encouraging to read that “[w]ork is underway in PRICE Lab that applies these methods to issues in specific markets, including those for personal loans, energy and mobile phones”.

    But one’s heart sinks when one notes the identity of the joint funders. Economic regulation and competition and consumer protection in Ireland are a sick and costly joke at the expense of citizens as final consumers and tax payers. Not surprisingly, given their abysmal record, the regulators and competition body are extremely touchy and sensitive. Researchers investigating issues that arise in their bailiwicks have to tiptoe around. And so we get
    “…while the experimental findings have implications for policy, it needs to be borne in mind that the evidence supplied here is only one factor in determining whether any given intervention in markets is likely to be beneficial…Interventions that reduce …complexity for consumers may therefore be beneficial, but nothing in the present research addresses the potential costs of such interventions, or how providers are likely to respond to them. The findings are also general in nature and are intended to give insights into consumer choices across markets. There are likely to be additional factors specific to certain markets that need to be considered in any analysis of the costs and benefits of a potential policy change. Most importantly, the policy implications discussed here are not specific to Ireland or to any particular product market. Furthermore, they should not be read as criticisms of existing regulatory regimes, which already go to some lengths in assisting consumers to deal with complex products. Ireland currently has extensive regulations designed to protect consumers, both in general and in specific markets..” and so on.

    One can only imagine the constraints the researchers will be under as they focus on products and services subject to regulation by the joint funders.

    However, the focus on consumers’ evaluations is highly convenient for the regulatory bodies funding this work as it deflects attention from the structures, organisation and behaviour of the service providers. It is interesting that this research makes no reference to the soon-to-be-completed two-year investigation of energy (electricity and gas) supply in Britain being conducted by the UK Competition and Markets Authority (CMA) which similarly focused on consumers to deflect attention from the price-gouging suppliers. While it uses words like “disengaged” and “non-responsive” the CMA basically concludes that 70% of energy suppliers are either too lazy or too stupid to switch to lower prices offers either from their existing supplier or other suppliers. Initially, responding to the “steer” it had received from the UK Government which raised concerns about “disengaged consumers”, the CMA proposed applying a “regulated safeguard tariff” (RST) to prevent these consumers being gouged. However, in the face of ferocious opposition from the energy suppliers, the Government took fright and issued a revised “steer” to the CMA which no longer contains the reference to disengaged consumers. The CMA now proposes to apply a version of the RST only to prepayment meter consumers. Ofgem, the energy regulator, will manage a database of the 70% of disengaged consumers and they will be inundated by junk mail from all suppliers. You really couldn’t make it up.

    Consumers of energy – and other utility services – are being ripped off more rapaciously in Ireland than they are in Britain. However, I very much doubt that the PRICELab researchers will be allowed to investigate this – or to offer remedies.

    1. @Paul Hunt

      Paul, I wrote those words you quote and, reading them again, I stand over every one of them. Any regulation that is introduced needs to consider costs as well as benefits, plus potential equilibrium effects. The qualifying paragraphs were written precisely because we didn’t want people to make unjustified leaps of inference from our research to support predetermined positions about “rip-offs” and “gouging”.

      ESRI research is independent. When you “imagine the constraints” we are under, you are doing just that.

      As behavioural economics uncovers evidence of how consumers make choices it is becoming ever more apparent that the implications for regulation are not straightforward and will need careful consideration. Evidence for substantial consumer detriment in some of the relevant markets is accumulating, but it takes a process of research to understand its extent and causes and, importantly, to test potential solutions. PRICE Lab has made an initial contribution to that process and there is plenty more to come – unconstrained.

      1. @Pete Lunn,

        Thank you for your response. I wish you and your colleagues well as you progress this work.

        I don’t think you have any need to worry about people making unjustified leaps of inference from your research.

        And as you for your assertion about “pre-determined” positions, the supporting evidence exists but there is a perfectly understandable resistance to consider it.

        I don’t doubt that ESRI research is independent – once the research question has been formulated in a manner acceptable to those funding the research.

        Much of the consumer detriment that is emerging in markets where an artifical form of competition and consumer choice was introduced – and where evidence of, in your words, “substantial consumer detriment” is accumulating – was entirely predictable. It doesn’t require the refined insights and applications of behavioural economics to understand the causes and extent of these detriments. In the absence of effective advocacy and representation of the collective interests of final consumers the detriments are inevitable.

        However, what both amuses and dismays me is the politicians’ and policymakers’ determination to ignore the blatant institutional and organisational dysfuntion and, instead, to throw resources at demonstrating that consumers are not acting in their best interests and to seek remedies in attempts to modify consumers’ behaviour.

        However, when politicians are prepared to fund research in this area to distract attention from serious dysfunction, it would be foolish of researchers not to grab the funding.

      2. Pete

        Your paper on Groupthink and the banks was fantastic.
        I imagine there are reams of crap to get through before coming to bulletproof conclusions about product marketing in Ireland. In fiNance in particular my impression is that consumers are defenceless.

  2. I suppose its useful to have empirical evidence for somthing that seems to be fairly obvious. Peoples concept of value can be influanced by making products more complex and they see more value if the price is higher.
    It seems as though there is a basic assumption in this work. That functioning markets should help consumers make logical choices in order to buy the goods and services they need. But that is patently not what happens in the real world. What about advertising, what about PR what about simple salesmanship?
    Sure there are increasing complex ways to fool the gullible masses such as offering consumers increasingly complex products to fool them in to seeing extra value but it wouldnt be as powerful at fooling consumers as advertising and I presume no one is suggesting we ban advertising on the grounds that people may be more likely to buy the product or service due to the extra value percieved after watching an ad.

  3. It is common knowledge in marketing that for products or services which are close to being commodities, in order to avoid competing on simply (i) price and (ii) quality of service, you muddy the waters with oodles and oodles of ‘customer choice’.

    The research is interesting though.

    1. @grumpy

      I agree. The “practitioners” are years ahead of the theorists on this stuff. The economists are always playing catch-up. A bit like Kevin Johnson’s “Rock and roll I gave you all the best years of my life”. And by the time they’ve caught up the practitioners have moved on. They now have huge volumes of data to identify and to exploit consumers’ preferences, foibles, biases and blind-spots. And, boy, do they exploit it. I always work on the basis that every large company that deals directly with the public is a conspiracy against the public.

      This is particularly the case when it comes to utility services such as electricity, gas, water and telecomms and quasi-utility services such as banking and insurance. Most competition and economic regulatory bodies either have been established as emasculated creatures or have been suborned and choose not to exercise the powers they have to ensure consumers interests are represented and protected (or a bit of both). The competition and sectoral economic regulatory bodies in Ireland should be deprived of this labelling as they are policy-implementing agencies – implementing government policy as directed and influenced by powerful special interests at the expense of final consumers and service-users. (The CER’s role as a policy-implementing agency was fully exposed when it published its “decision” on water charges in early Oct. 2014 and provoked the public protests which so panicked the then government.) Most bodies of this nature in the other advanced economies are not much better. The exceptions might include some of the US federal and state-level regulatory commissions and the DoJ, the European Commission’s DG COMP (even if many of its high-profile cases are politically motivated) and Germany’s Bundeskartellamt (BKartA). The UK’s CMA and sectoral regulators such as Ofgem and Ofwat are as much a sick and costly joke at the expense of consumers as their Irish counterparts. The CMA’s proposed “remedies” coming near the end of lengthy investigations of energy supply and retail banking present damning evidence of its uselessness.

  4. Off topic. The site needs an open Eurozone thread
    http://www.ft.com/cms/s/0/ac187312-12cf-11e6-839f-2922947098f0.html

    Under the Bretton Woods system of semi-fixed exchange rates, Germany’s strategy has been to lock itself into fixed exchange rate system then seek a “real” devaluation through lower relative wages than its competitors. When the system imploded an appreciation of the D-Mark followed. The same happened in the exchange rate mechanism, a precursor to the euro created in the late 1970s. But the euro is meant to be forever. There is no longer any corrective mechanism to Germany’s imbalances.

  5. @Pete Lunn et al.

    Keep up the good work.

    Multi-factorial complexity in marketing has one purpose; milk the suckers!

    The suckers are grateful!

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