Duopolistic competition with choice-overloaded consumers
Abstract
A large body of empirical work has suggested the existence of a “choice overload” effect in consumer decision making: when faced with large menus of alternatives, decision makers often avoid/indefinitely defer choice. An explanation for the occurrence of this effect is that consumers try to escape the higher cognitive effort that is associated with making an active choice in large menus. Building on this explanation, we propose and analyse a model of duopolistic competition where firms compete in menu design in the presence of a consumer population with heterogeneous preferences and overload menu-size thresholds. The firms’ strategic trade-off is between offering a large menu in order to match the preferences of as many consumers as possible, and offering a small menu in order to avoid losing choice-overloaded consumers to their rival or driving them out of the market altogether. We study the equilibrium outcomes in this market and establish some (im)possibility results and characterizations under a variety of assumptions. We also propose a measure of market effectiveness that may be thought of as a proxy for consumer welfare in this environment, and use it alongside our model to provide a critical perspective on regulations that cap the number of products that firms could offer.
Citation
Gerasimou , G & Papi , M 2018 , ' Duopolistic competition with choice-overloaded consumers ' , European Economic Review , vol. 101 , pp. 330-353 . https://doi.org/10.1016/j.euroecorev.2017.10.002
Publication
European Economic Review
Status
Peer reviewed
ISSN
0014-2921Type
Journal article
Rights
Copyright © 2017, Elsevier B.V. This work is made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. Images contained in Appendix C are all rights reserved, and not included in the CC-BY-NC-ND licence. The final published version of this work is available at https://doi.org/10.1016/j.euroecorev.2017.10.002
Collections
Items in the St Andrews Research Repository are protected by copyright, with all rights reserved, unless otherwise indicated.