Selling to consumers who cannot detect small differences

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2021-03-01

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Abstract

This paper studies how sellers behave when their consumers have difficulty in detecting small differences. These consumers pose a problem because, even if a good deal exists, they cannot appreciate it if it is barely better than their outside options. This creates a role for a second deal, either marketed by the same seller or by another seller, even when consumers are homogeneous in their tastes. If the same seller markets the second deal, it will strategically position the first as a good deal, and the second as a bad deal, and use the bad deal to help consumers appreciate the good deal. If another seller markets the second deal, the two sellers will become specialized as, respectively, good-deal and bad-deal providers. Both sellers free-ride each other. The good-deal provider is happy because the bad deal helps consumers appreciate its good deal; while the bad-deal provider hides behind the presence of the good deal and manages to make a sale some of the time.

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Published Version (Please cite this version)

10.1016/j.jet.2021.105186

Publication Info

Chung, KS, EM Liu and M Lo (2021). Selling to consumers who cannot detect small differences. Journal of Economic Theory, 192. pp. 105186–105186. 10.1016/j.jet.2021.105186 Retrieved from https://hdl.handle.net/10161/23705.

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