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The term overconfidence is used broadly in the psychology literature, referring to both overoptimism and overprecision. Overoptimistic individuals overestimate their own abilities or prospects. In contrast, overprecise individuals place overly narrow confidence intervals around forecasts, thereby underestimating uncertainty. These biases can lead consumers to misforecast their future product usage, or to overestimate their abilities to navigate contract terms. In consequence, consumer overconfidence causes consumers to systematically misweight different dimensions of product quality and price. Poor choices based on biased estimates of a product's expected costs or benefits are the result. For instance, overoptimism about self-control is a leading explanation for why individuals overpay for gym memberships that they underutilize. Similarly, overprecision is a leading explanation for why individuals systematically choose the wrong calling plans, racking up large overage charges for exceeding usage allowances in the process. Beyond these market effects of overconfidence, this paper addresses three additional questions: What will firms do to exploit consumer overconfidence? What are the equilibrium welfare consequences of consumer overconfidence for consumers, firms, and society? And what are the implications of consumer overconfidence for public policy?

Firms'incentives to manufacture biased user reviews impede review usefulness. We examine the differences in reviews for a given hotel between two sites: Expedia. com (only a customer can post a review) and TripAdvisor. com (anyone can post). We argue that the net gains from promotional reviewing are highest for independent hotels with single-unit owners and lowest for branded chain hotels with multiunit owners. We demonstrate that the hotel neighbors of hotels with a high incentive to fake have more negative reviews on TripAdvisor relative to Expedia; hotels with a high incentive to fake have more positive reviews on TripAdvisor relative to Expedia.

This article examines a model in which advertisers bid for \"sponsored-link\" positions on a search engine. The value advertisers derive from each position is endogenized as coming from sales to a population of consumers who make rational inferences about firm qualities and search optimally. Consumer search strategies, equilibrium bidding, and the welfare benefits of position auctions are analyzed. Implications for reserve prices and a number of other auction design questions are discussed.

There is a widely held view within the general public that large corporations should act in the interests of a broader group of agents than just their shareholders (the stakeholder view). This paper presents a framework where this idea can be justified. The point of departure is the observation that a large firm typically faces endogenous risks that may have a significant impact on the workers it employs and the consumers it serves. These risks generate externalities on these stakeholders which are not internalized by shareholders. As a result, in the competitive equilibrium, there is underinvestment in the prevention of these risks. We suggest that this under-investment problem can be alleviated if firms are instructed to maximize the total welfare of their stakeholders rather than shareholder value alone (stakeholder equilibrium). The stakeholder equilibrium can be implemented by introducing new property rights (employee rights and consumer rights) and instructing managers to maximize the total value of the firm (the value of these rights plus shareholder value). If there is only one firm, the stakeholder equilibrium is Pareto optimal. However, this is not true with more than one firm and/or heterogeneous agents, which illustrates some of the limits of the stakeholder model.

This paper proposes a perfectly competitive model of a market with adverse selection. Prices are determined by zero-profit conditions, and the set of traded contracts is determined by free entry. Crucially for applications, contract characteristics are endogenously determined, consumers may have multiple dimensions of private information, and an equilibrium always exists. Equilibrium corresponds to the limit of a differentiated products Bertrand game. We apply the model to establish theoretical results on the equilibrium effects of mandates. Mandates can increase efficiency but have unintended consequences. With adverse selection, an insurance mandate reduces the price of low-coverage policies, which necessarily has indirect effects such as increasing adverse selection on the intensive margin and causing some consumers to purchase less coverage.

This paper proposes a model in which identical sellers of a homogeneous product compete in both prices and price frames (i.e., ways to present price information). Frame choices affect the comparability of price offers and may cause consumer confusion and lower price sensitivity. In equilibrium, firms randomize their frame choices to obfuscate price comparisons and sustain positive profits. The nature of the equilibrium depends on whether frame differentiation or frame complexity is more confusing. Moreover, an increase in the number of competitors induces firms to rely more on frame complexity, and this may boost industry profits and lower consumer surplus. This paper was accepted by J. Miguel Villas-Boas, marketing.

This article studies market competition when firms can influence consumers' ability to compare market alternatives through their choice of price \"formats.\" In our model, the ability of a consumer to make a comparison depends on the firms' format choices. Our main results concern the interaction between firms' equilibrium price and format decisions and its implications for industry profits and consumer switching rates. In particular, market forces drive down the firms' profits to a \"constrained competitive\" benchmark if and only if the comparability structure satisfies a property that we interpret as a form of \"frame neutrality.\" The same property is necessary for equilibrium behavior to display statistical independence between price and format decisions. We also show that narrow regulatory interventions that aim to facilitate comparisons may have an anticompetitive effect.

Bayesian consumers infer that hidden add-on prices (e.g., the cost of ink for a printer) are likely to be high prices. If consumers are Bayesian, firms will not shroud information in equilibrium. However, shrouding may occur in an economy with some myopic (or unaware) consumers. Such shrouding creates an inefficiency, which firms may have an incentive to eliminate by educating their competitors' customers. However, if add-ons have close substitutes, a \"curse of debiasing\" arises, and firms will not be able to profitably debias consumers by unshrouding add-ons. In equilibrium, two kinds of exploitation coexist. Optimizing firms exploit myopic consumers through marketing schemes that shroud high-priced add-ons. In turn, sophisticated consumers exploit these marketing schemes. It is not possible to profitably drive away the business of sophisticates. It is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms. We show that informational shrouding flourishes even in highly competitive markets, even in markets with costless advertising, and even when the shrouding generates allocational inefficiencies.

I examine how the increasing ability of firms to target their ads influences market outcomes when consumers have access to advertising-avoidance tools. Although firms generally benefit from improved targeting, consumers need not. I also show that there may be too little blocking of ads in equilibrium and consider the role of targeted advertising when niche firms compete against mass-market firms.

1. Environmental temperature has systematic effects on rates of species interactions, primarily through its influence on organismal physiology. 2. We present a mechanistic model for the thermal response of consumer–resource interactions. We focus on how temperature affects species interactions via key traits – body velocity, detection distance, search rate and handling time – that underlie per capita consumption rate. The model is general because it applies to all foraging strategies: active-capture (both consumer and resource body velocity are important), sit-and-wait (resource velocity dominates) and grazing (consumer velocity dominates). 3. The model predicts that temperature influences consumer–resource interactions primarily through its effects on body velocity (either of the consumer, resource or both), which determines how often consumers and resources encounter each other, and that asymmetries in the thermal responses of interacting species can introduce qualitative, not just quantitative, changes in consumer–resource dynamics. We illustrate this by showing how asymmetries in thermal responses determine equilibrium population densities in interacting consumer–resource pairs. 4. We test for the existence of asymmetries in consumer–resource thermal responses by analysing an extensive database on thermal response curves of ecological traits for 309 species spanning 15 orders of magnitude in body size from terrestrial, marine and freshwater habitats. We find that asymmetries in consumer–resource thermal responses are likely to be a common occurrence. 5. Overall, our study reveals the importance of asymmetric thermal responses in consumer–resource dynamics. In particular, we identify three general types of asymmetries: (i) different levels of performance of the response, (ii) different rates of response (e.g. activation energies) and (iii) different peak or optimal temperatures. Such asymmetries should occur more frequently as the climate changes and species' geographical distributions and phenologies are altered, such that previously noninteracting species come into contact. 6. By using characteristics of trophic interactions that are often well known, such as body size, foraging strategy, thermy and environmental temperature, our framework should allow more accurate predictions about the thermal dependence of consumer–resource interactions. Ultimately, integration of our theory into models of food web and ecosystem dynamics should be useful in understanding how natural systems will respond to current and future temperature change.