26. Ryan Bubb and Alex Kaufman, Comsumer Biases and Firm Ownership, 9/2008.

Abstract: Recent work has explored the implications of behavioral biases among consumers for
firm behavior and has documented that profit-maximizing firms exploit consumer biases in the contracts
they offer consumers. In this paper we show how ownership of the firm by its customers,
as well as nonprofit ownership, can be used as commitment devices to avoid offering contracts that
exploit consumer biases. In a model of a market in which for-profit investor-owned firms and mutual
firms compete, sophisticated consumers who are biased but aware of their biases patronize mutual
firms, while unbiased consumers and naive consumers who underestimate their biases patronize forprofit
firms. Mutuals serving sophisticates offer high base prices but low “penalty” prices, while
for-profits offer low base prices and high penalty prices, resulting in transfers from naive biased
consumers to unbiased consumers. We present evidence from a range of markets that supports our
theory.

 

26:PDF

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