Steering Fallible Consumers

Paul Heidhues &Mats Köster & Botond Kőszegi

Working Paper(2022)

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Da Yeon Cheong

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Microeconomics Reading Group

Yonsei University

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• Internet companies influence consumers through steering – influencing which products a consumer considers for purchase
• Existing research typically assume that consumers are rational, and steering is based on information about their preferences.
• “Fallible Consumers”: consumers make mistakes in evaluating purchasing options
• What is the effect of steering when consumers are fallible?

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Introduction

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INTERMEDIARY

Consumer

Model

Sellers

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Symmetric sellers

Fixed Commission per Sale

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Benchmark: Fully Rational Consumers

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• Proposition 3 (Welfare Effect of Value-Based Steering) .
1. Sufficiently strong value-based steering benefits the consumer.

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• If steering is strong, intermediary tends to recommend a product the consumer is unlikely to reject.
• Intermediary offers product with extremely high value

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Value-Based Steering

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• Proposition 3 (Welfare Effect of Value-Based Steering) .
2. If consumer does not buy reasonably, sufficiently weak value-based steering harms her.

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• All weak steering does is eliminate products with extremely low values
• It eliminate nearly irrelevant products which induces additional purchases
• If consumer does not buy reasonably, this is harmful

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Value-Based Steering

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• Proposition 3 (Welfare Effect of Value-Based Steering) .
3. The following are equivalent.

(a) The consumer buys reasonably

(b) Value-based steering benefits the consumer for any signal structure of the intermediary

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• Steering improves the selection of products, leading to additional purchases better than those from a random selection
• Consumer that buys reasonably already benefit from random product offer.

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Value-Based Steering

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• Proposition 4 (Welfare Effect of Mistake-Based Steering) .
1. The following are equivalent.

(a) The consumer does not buy reasonably

(b) Mistake-based steering harms the consumer for any signal structure of the intermediary.

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• A consumer who does not buy reasonably is already harmed by her choices from random selection
• Steering induces higher mistakes, leading to additional purchases that have even lower values

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Mistake-Based Steering

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• Proposition 4 (Welfare Effect of Mistake-Based Steering) .
2. If consumer buys reasonably, sufficiently weak mistake-based steering benefits her.

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• A consumer who buys reasonably already benefits by her choices from random selection
• Additional purchases through weak mistake-based steering are similar to those from a random selection

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Mistake-Based Steering

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• Proposition 4 (Welfare Effect of Mistake-Based Steering) .
3. The following are equivalent.

(a) The consumer does not refrain reasonably

(b) Mistake-based steering benefits the consumer for any signal structure of the intermediary.

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• A consumer who do not refrain reasonably is harmed by her rejection without steering
• Under strong steering, consumer almost never refrains.
• Extra purchases are less likely to be low-value under weak steering than under strong steering.

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Mistake-Based Steering

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• Proposition 4 (Welfare Effect of Mistake-Based Steering) .
4. If consumer refrains reasonably or is always reasonable, sufficiently strong mistake-based steering harms her.

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• Under strong steering, consumer almost never refrains.
• A consumer is harmed by strong steering when she would have otherwise refrained reasonably

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Mistake-Based Steering

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• Proposition 5 (Welfare Effect of Perceived-Value-Based Steering) .
1. The following are equivalent.

(a) The consumer buys reasonably

(b) Perceived-value-based steering benefits the consumer for any signal structure of the intermediary.

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• If consumer buys reasonably, then steering always benefits her.
• If consumer does not buy reasonably, then the rise in purchase probability harms her.

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Perceived-Value-Based Steering

• Consumers are likely to refrain reasonably and not buy reasonably
• Firms may exploit many biases to induce purchases of useless products
• Online sellers use manipulative practices termed “dark pattern” (E.g. Hidden Prices)

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• Strong steering likely describes many online markets of the present or near future

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• Recall:
• Value-based steering:
• Strong steering is always beneficial to consumers
• Mistake-based steering:
• Mistake-based steering is always harmful to consumers who do not buy reasonably
• Perceived-value-based steering:
• Strong steering may or may not be beneficial to consumers who do not buy reasonably

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• Implications: What type of steering is actually going on?

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• Intermediaries’ practices likely result in mistake-based and perceived-value-based steering.

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• A/B Testing
• Intermediaries run experiments called “A/B tests” (Kohavi et al., 2020)
• Comparing product-framing pairs: framing corresponds to how and under what circumstances the product is presented
• Perceived-value-based steering: intermediary learns which products to offer to which consumers
• Mistake-based steering: testing different ways of selling the same product

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Real–Life Steering

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• Machine-Learning Algortihms
• Algorithms use patterns to predict behavior
• Such patterns are not understood, but lead to mistake-based steering
• Examples of Mistake-based steering:
• Direct consumers toward sellers with deceptive and high prices (life insurance(Anagol et al., 2017) / finanancial investments(Mullainathan et al., 2011)
• Take advantage of projection bias by using momentary weather conditions at the consumer’s location (WeatherAds)
• Infer a consumer’s gullibility from her search behavior, and offer her deceptive products (Google ads)
• Algorithms are trained in part on data from A/B tests (Kohavi et al., 2020)

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Real–Life Steering

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• When do steering benefit consumers?

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• Recall that perceived-value-based steering is beneficial when consumer buys reasonably.
• This is achieved through familiar products and transparent prices
• Example:
• Users can manually update “interest profiles”
• Consumer may express a specific interest by initiating a search for a well-defined, narrow range of products

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Real–Life Steering

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• Thinking about steering in terms of a rational model is often misleading.
• A/B test-based steering and Machine-learning based steering are likely detrimental
• Policy Implications:
• Restricting mistake-based steering is probably beneficial
• Restricting steering toe be based on self-initiated search and self-declared interests would be beneficial
• Regulators might direct steering toward value-based steering

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Conclusion