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Surplus Identification with Non-Linear Returns

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  • Lunn, Pete
  • Somerville, Jason J.

Abstract

We present evidence from two experiments designed to quantify the impact of cognitive constraints on consumers’ ability to identify surpluses. Participants made repeated forced-choice decisions about whether products conferred surpluses, comparing one or two plainly perceptible attributes against displayed prices. Returns to attributes varied in linearity, scale and relative weight. Despite the apparent simplicity of this task, in which participants were incentivised and able to attend fully to all relevant information, surplus identification was surprisingly imprecise and subject to systematic bias. Performance was unaffected by monotonic non-linearities in returns, but non-monotonic non-linearities reduced the likelihood of detecting a surplus. Regardless of the shape of returns, learning was minimal and largely confined to initial exposures. Although product value was objectively determined, participants exhibited biases previously observed in subjective discrete choice, suggesting common cognitive mechanisms. These findings have implications for consumer choice models and for ongoing attempts to account for cognitive constraints in applied microeconomic contexts.

Suggested Citation

  • Lunn, Pete & Somerville, Jason J., 2015. "Surplus Identification with Non-Linear Returns," Papers WP522, Economic and Social Research Institute (ESRI).
  • Handle: RePEc:esr:wpaper:wp522
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    1. repec:eee:joepsy:v:61:y:2017:i:c:p:1-14 is not listed on IDEAS
    2. Crosetto, Paolo & Gaudeul, Alexia, 2016. "A monetary measure of the strength and robustness of the attraction effect," Economics Letters, Elsevier, vol. 149(C), pages 38-43.
    3. Cosmo, Valeria Di & O’Hora, Denis, 2017. "Nudging electricity consumption using TOU pricing and feedback: evidence from Irish households," Journal of Economic Psychology, Elsevier, vol. 61(C), pages 1-14.

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