Brown Bag Seminar: Johannes Johnen

Browsing versus Studying Offers

Johannes JOHNEN, CORE

A large literature studies the implications of the observation that before making a purchase, consumers must search for and understand the available products. Most of this literature assumes that if a consumer chooses to search a particular product, then she comes to understand it perfectly. In many or most situations, however, a first look at a product reveals only a subset of its features, and learning more requires further costly search. For example, a consumer may spend a little bit of time to find out a cell-phone contract's monthly fee, but understanding the precise conditions, additional fees, and potential traps takes additional time; and a house buyer may learn the basic dimensions of a home, but she needs more investment to uncover deeper problems. When faced with such situations, consumers must make a difficult and in economics hitherto unexplored choice: whether to browse more products superficially, or understand fewer products in detail.

In this paper, we introduce a simple model of the above dilemma, and study how it interacts with sellers' product design and pricing as well as policy.  

A common argument against consumer protection and other interventions aimed at improving individuals' decisions and welfare is the “nanny-state” concern. Just like an overprotective nanny can hurt the long-run health of a child by preventing her from learning where and when to be careful, an overly paternalistic policymaker can hurt consumers. In particular, if policy is implemented to protect people from biases and tendencies that tend to decrease their well-being, then we mitigate their incentives to learn to protect themselves, thereby undermining the effectiveness of the policy. Besides being a regular question in seminars, this argument is commonly made in the popular press as well as scholarship in law and economics.

In this paper, we argue that with well-designed consumer protection, the opposite is the case: policies can enhance the quality of decisionmaking and competition not only through their direct effect of preventing mistakes, but by allowing consumers to substitute effort from meaningless to meaningful learning activities. Consumer protection thereby has a beneficial multiplier effect.