The John M. Olin Center

Paper Abstract

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26. Ryan Bubb and Alex Kaufman, Comsumer Biases and Firm Ownership, 9/2008.

Abstract: Recent work has explored the implications of behavioral biases among consumers for firm behavior and has documented that profit-maximizing firms exploit consumer biases in the contracts they offer consumers. In this paper we show how ownership of the firm by its customers, as well as nonprofit ownership, can be used as commitment devices to avoid offering contracts that exploit consumer biases. In a model of a market in which for-profit investor-owned firms and mutual firms compete, sophisticated consumers who are biased but aware of their biases patronize mutual firms, while unbiased consumers and naive consumers who underestimate their biases patronize forprofit firms. Mutuals serving sophisticates offer high base prices but low “penalty” prices, while for-profits offer low base prices and high penalty prices, resulting in transfers from naive biased consumers to unbiased consumers. We present evidence from a range of markets that supports our theory.