Strange Case of Dr. Bidder and Mr. Entrant: Consumer Preference Inconsistencies in Costly Price Offers

Abstract

Consumers make price offers to sellers in a variety of domains, such as when buying cars or houses or when bidding in auctions for airline upgrades, art, or collectibles. Submitting an offer typically entails administrative, waiting, and opportunity costs. Making such costly price offers involves two intertwined decisions—in addition to determining how much to offer, consumers must also decide whether to make an offer in the first place. We examine the impact of offer-submission costs on consumer behavior using a series of incentive-compatible experiments. Our findings reveal a preference inconsistency, whereby the preferences implied by one of the decisions do not align with the preferences implied by the other. In particular, potential buyers enter more often than their offer amounts would predict based on standard economic models. This preference inconsistency is robust to two interventions designed to help consumers make offer-amount and entry decisions—(1)the provision of interactive-feedback decision aids and (2)the sequencing of the two sub-decisions in the normative order. Neither of these interventions resolves the inconsistency. Instead, the patterns of results suggest that consumers approach the offer-amount and entry decisions as if they were unrelated. We discuss the implications of our findings for the design of offer-submission interfaces, as well as for econometric attempts to infer consumer preferences from offer and bidding data.