Salience and Skewness Preferences
2020-10-01, Dertwinkel-Kalt, Markus, Köster, Mats
Whether people seek or avoid risks on gambling, insurance, asset, or labor markets crucially depends on the skewness of the underlying probability distribution. In fact, people typically seek positively skewed risks and avoid negatively skewed risks. We show that salience theory of choice under risk can explain this preference for positive skewness, because unlikely, but outstanding payoffs attract attention. In contrast to alternative models, however, salience theory predicts that choices under risk not only depend on the absolute skewness of the available options, but also on how skewed these options appear to be relative to each other. We exploit this fact to derive novel, experimentally testable predictions that are unique to the salience model and that we find support for in two laboratory experiments. We thereby argue that skewness preferences—typically attributed to cumulative prospect theory—are more naturally accommodated by salience theory.
Incumbency Dominance in Letters to the Editor : Field Experimental Evidence
2019, Dertwinkel-Kalt, Markus, Kerkhof, Anna, Münster, Johannes
This article reports the results of a randomized field experiment conducted three weeks before the 2017 federal election in Germany. Four different versions of a letter to the editor were sent to all the German daily newspapers that handle letters to the editor independently. The versions differed in the subject matter of the letter, the chancellor Angela Merkel versus the main challenger Martin Schulz, and in the evaluation of this subject, positive versus negative. The experiment was designed to test for three different types of media bias: political bias, negativity bias, and incumbency dominance. We find no political bias in the decisions to print letters, and no statistically significant negativity bias. We do observe incumbency dominance: letters about the chancellor were 40% more likely to be printed.
Demand Shifts Due to Salience Effects: Experimental Evidence
2017, Dertwinkel-Kalt, Markus, Köhler, Katrin, Lange, Mirjam R. J., Wenzel, Tobias
We conduct a laboratory experiment that tests two fundamental predictions unique to salience theory. If an agent purchases one of two vertically differentiated products, salience theory makes the following two distinct predictions. First, it hypothesizes that a higher expected price level for both products shifts demand toward the more expensive, high-quality product. Second, it predicts that demand for the high-quality product is larger if the price level is expectedly high than if it is unexpectedly high. In our experiment, subjects purchased fast or slow Internet access at different price levels. Our results strongly support both predictions of salience theory. (JEL: D03)
Concentration Bias in Intertemporal Choice
2022, Dertwinkel-Kalt, Markus, Gerhardt, Holger, Riener, Gerhard, Schwerter, Frederik, Strang, Louis
Many intertemporal trade-offs are unbalanced: while the advantages of options are concentrated in a few periods, the disadvantages are dispersed over numerous periods. We provide novel experimental evidence for “concentration bias,” the tendency to overweight advantages that are concentrated in time. Subjects commit to too much overtime work that is dispersed over multiple days in exchange for a bonus that is concentrated in time: concentration bias increases subjects’ willingness to work by 22.4% beyond what standard discounting models could account for. In additional conditions and a complementary experiment involving monetary payments, we study the mechanisms behind concentration bias and demonstrate the robustness of our findings.
Multi-product bargaining, bundling, and buyer power
2020, Dertwinkel-Kalt, Markus, Wey, Christian
We re-consider the bilateral bargaining problem of a multi-product, manufacturer–retailer trading relationship. O’Brien and Shaffer (2005) have shown that the unbundling of contracts leads to downward distorted production levels if seller power is strong, while otherwise the joint profit maximizing quantities are contracted (which is also always the case when bundling contracts are feasible). We show that the unbundling of contracts also leads to downward distorted output levels when the buyer firm has sufficient (Nash) bargaining power (i.e., buyer power). Our result is driven by cost substitutability (diseconomies of scope).
Focusing and framing of risky alternatives
2019, Dertwinkel-Kalt, Markus, Wenzel, Tobias
This paper develops a theory of focusing and framing in an intertemporal context with risky choices. We provide a selection criterion between existing theories of focusing by allowing a decision maker to choose her frame such that her attention is either drawn to salient events associated with an option or to the expected utilities an option yields in different time periods. Our key assumption is that a decision maker can choose her frame in a self-serving manner. We predict that the selected frame induces overoptimistic actions in the sense that subjects underrate downside risk but overrate upside risk and accordingly reveal overoptimistic choices. Hence, our theory can explain phenomena such as excessive harmful consumption (smoking, unhealthy diet) and risky investments (entrepreneurship, lotteries, gambling) in one coherent framework. Notably, overoptimistic actions are not universal, but have plausible limits. We characterize under which situations overoptimistic actions are most likely to occur and under which circumstances choices should be rational or even pessimistic.
Evidence Production in Merger Control : The Role of Remedies
2021-08, Dertwinkel-Kalt, Markus, Wey, Christian
We analyze evidence production in merger control as a delegation problem in an inquisitorial competition policy system. The antitrust agency’s incentives to produce evidence on the efficiency of a merger proposal depend critically on its action set. Allowing for a compromising remedy solution reduces information acquisition incentives, and could therefore reduce consumer welfare. The effort-frustrating effect of the remedy solution can be eliminated if a remedy solution can be implemented only after evidence on the efficiency of a merger proposal has been produced.
To buy or not to buy? : Price salience in an online shopping field experiment
2020, Dertwinkel-Kalt, Markus, Köster, Mats, Sutter, Matthias
We examine whether shrouding or partitioning of a surcharge raises demand in online shopping. In a field experiment with more than 34,000 consumers, we find that consumers in the online shop of a cinema are more likely to select tickets for a 3D movie when the 3D surcharge is shrouded, but they also drop out more often when the overall price is shown at the checkout. In sum, the demand distribution is independent of the price presentation. This result outlines the limits of the effectiveness of shrouding practices.
Attention-driven demand for bonus contracts
2019, Dertwinkel-Kalt, Markus, Köster, Mats, Peiseler, Florian
In many markets supply contracts include a series of small, regular payments made by consumers and a single, large bonus that consumers receive at some point during the contractual period. But, if for instance its production costs exceed its value to consumers, such a bonus creates inefficiencies. We offer a novel explanation for the frequent occurrence of bonus contracts, which builds on a model of attentional focusing. Our main result identifies market conditions under which bonus contracts should be observed: while a monopolist pays a bonus to consumers—if at all—only for low-value goods, firms standing in competition always—i.e., independent of the consumers’ valuation—offer bonus contracts. Thus, competition does not eliminate but rather exacerbates inefficiencies arising from contracting with focused agents. Common contract schemes in markets for electricity, telephony, and bank accounts are consistent with our model, but cannot be reconciled with alternative approaches such as models on consumption smoothing, (quasi-)hyperbolic discounting, or switching costs.