Since the typical consumer evaluates only a small fraction of available products, online intermediaries with information about her tendencies often direct her attention toward products she is more likely to purchase. We analyze the implications of such “steering” for a consumer’s welfare when she is “fallible” in that she makes mistakes in evaluating products and fails to account for the steering going on. The welfare effect depends on the interaction of three factors: (1) the type of information used for steering, specifically whether the information pertains to the consumer’s true values for products, her mistakes, or her perceived values; (2) the “strength” of steering, i.e., its ability to find products the consumer is most likely to purchase; and (3) the “reasonability” — a relaxation of full rationality — of the consumer in buying and refraining from buying. Strong mistake-based steering is typically harmful, sometimes extremely so, and under specific circumstances, the other types of steering can also hurt the consumer. We argue that much real-life steering — for instance that guided by extensively used randomized marketing experiments called “A/B tests” — is or will soon be strong and mistake-based, raising the scope for a broader regulation of steering practices.
Joint work with Mats Köster (CEU) and Botond Köszegi (CEU)
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