I am a Behavioral Economist, focusing on questions in Quantitative Marketing, Industrial Organization, and Public Economics. My main research focus is on the behavioral economics of firms: How should firms account for behavioral consumers? How do firms respond in practice? Are firms sometimes behavioral too?
I obtained my PhD in Economics from the University of California, Berkeley.
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More than a Penny's Worth: Left-Digit Bias and Firm Pricing
The Review of Economic Studies 2022
[FINAL] [2019 version here, similar results - different data]
Firms arguably price at 99-ending prices because of left-digit bias—the tendency of consumers to perceive a $4.99 as much lower than a $5.00. Analysis of retail scanner data on 3500 products sold by 25 US chains provides robust support for this explanation. I structurally estimate the magnitude of left-digit bias and find that consumers respond to a 1-cent increase from a 99-ending price as if it were more than a 20-cent increase. Next, I solve a portable model of optimal pricing given left-digit biased demand. I use this model and other pricing procedures to estimate the level of left-digit bias retailers perceive when making their pricing decisions. While all retailers respond to left-digit bias by using 99-ending prices, their behavior is consistently at odds with the demand they face. Firms price as if the bias were much smaller than it is, and their pricing is more consistent with heuristics and rule-of-thumb than with optimization given the structure of demand. I calculate that retailers forgo 1 to 4 percent of potential gross profits due to this coarse response to left-digit bias.
Sophisticated Consumers with Inertia: Long-Term Implications from a Large Scale Field Experiment (with Klaus Miller and Navdeep Sahni)
[UPDATED March 2023]
Are inert consumers aware of their future inertia? This field experiment offers two million readers of a European newspaper auto-renewing and auto-canceling contracts. Consumers are inert, yet sophisticated about their inertia: Auto-renew takers are inert, yet offering auto-renewing contracts lowers subscriptions by 24% and reduces the number of subscribers by 10% over two years. We estimate that 70% of readers in the population are inert, and the majority of them are sophisticated; among auto-renew subscribers, only 6% are sophisticated. Our results highlight the impact of sophistication about future biases on consumer behavior and market outcomes.
Economics typically assumes that firms use a model of the environment to choose optimal actions. I use a reform that restricted the set of admissible prices to test this assumption. Specifically, a reform in Israel limited prices to end with X0 as the cents digits (e.g. 2.90 but not 2.99). When consumers are left-digit biased, demand drops at round numbers, hence optimal pricing prescribes bunching at just-below prices and avoiding round prices. Israeli supermarket chains respond to left-digit bias in the long-run and act as if they know this demand structure, setting just-below prices for 45% of prices. This response is consistent with awareness of the bias; However, it implies underestimation of its magnitude since estimated demand should lead to even higher shares of 99-endings. Further, following the reform, 20% of prices were round (e.g. 3.00). If firms were model-based their response to the reform would have been to update immediately according to their beliefs and avoid round prices; However, firms set clearly dominated prices for almost a year, re-learning something they seemed to know. Further, price changes at the product-store level were that 00-endings changed into 90-endings but 90-endings were absorbing. Together these findings suggest that firms learn in a model-free way, which may lead them to be model-free decision makers. Model-free incomplete learning can explain how firms behave sub-optimally in a persistent way and challenges counterfactual exercises that rely on the assumption of model-based optimization.
The Impact of Group Size on Giving Versus Demand for Redistribution (with Johanna Mollerstrom and Dmitry Taubinsky)
[Media: BFI Economic Finding]
We report the results of an online experiment studying preferences for giving and preferences for group-wide redistribution in small (4-person) and large (200-person) groups. We find that the desire to engage in voluntary giving decreases significantly with group size. However, voting for group-wide redistribution is precisely estimated to not depend on group size. Moreover, people’s perception of the size of their reference group is malleable, and affects their desire to give. These results suggest that government programs, such as progressive tax-and-transfer systems, can help satisfy other-regarding preferences for redistribution in a way that creating opportunities for voluntary giving do not.
Choice Architecture, Privacy Valuations, and Data Selection (with Tesary Lin)
[NEW! April 2023]
How much do consumers’ privacy valuations change under the influence of choice architecture? How does this influence affect the efficiency of data collection, by changing not only the quantity of data collected but also its representativeness? To answer these questions, we run a large-scale choice experiment to elicit consumers’ valuation for their Facebook data while randomizing two common choice frames: default and price anchor. An opt-out default decreases valuations by 14%-22% compared to opt-in, while a $0–50 price anchor decreases valuation by 37%-53% compared to a $50–100 anchor. Moreover, in some consumer segments, the susceptibility to frame influence negatively correlates with consumers’ average valuation. Our results suggest that conventional frame optimization practices with a goal to maximize the supply of data can have opposite effects on its representativeness: A bias exacerbating effect emerges when consumers’ privacy valuations and frame effects are negatively correlated. On the other hand, such a volume-maximizing frame may also mitigate the bias by getting a high percentage of consumers into the sample data, thereby improving its coverage.
Work in Progress
New Model and Evidence on Goal-Setting as a Motivating Tool (with Alex Steiny Wellsjo)
The Dynamics of Following Defaults (with Rawley Heimer and Alex Imas)
Effect of subsidized in-home care on elders mortality and children’s labor supply (with Yuval Ofek-Shanny and Dan Zeltzer)
Behavioral Responses to GST and Firm Pricing (with Josh Dean)
Assistant Professor of Marketing
University of Chicago
Booth School of Business