infonet-economy

A distinctive feature of the modern consumer world is the possibility of customizing a product to a consumer’s exact specifications. Customization contributes to consumer welfare because it enables each consumer to select an attribute bundle that comes as close as possible to matching her preferences; greater variety within each attribute increases the likelihood that she will obtain exactly the option that maximizes her utility. One decision variable for firms that provide customizable products is how to order the product attributes in the configuration process. Does this order ultimately matter, even in cases where any attribute decision is reversible at any point in the configuration? We argue and demonstrate empirically that order of attribute presentation can exert an important influence on what bundle of attributes a consumer purchases because considering alternative attribute levels is mentally depleting. In addition, we characterize the pattern of mental depletion and show that it creates an opportunity that firms can exploit. The basic experimental treatment we discuss below involves a major durable product possessing multiple attributes that is configured by a consumer. Each attribute includes multiple options for the consumer to choose from; different attributes have different numbers of options. The configuration process is ordered either such that the attributes with a greater number of options come first in the sequence and are followed by the attributes with a smaller number of options, or vice versa. This is our only experimental treatment. Our argument relies on three basic premises. The first is that in many cases the prospective utility from an option is assessed at the time of the decision (Payne, Bettman and Johnson 1993); options that elicit utility beyond some minimum threshold level are more likely to be chosen. The second premise is that assessing utility requires effort that depletes a limited mental resource. This idea is inspired by research in psychology and economics in which self-control is modeled as a muscle: as selfcontrol is exerted, one’s capacity for self-control in subsequent situations is depleted unless there is adequate rest (Muraven and Baumeister 2000). The third premise is that consumers are partially “myopic” in their allocation of mental resources. Instead of distributing their mental effort efficiently across the configuration process, we invoke the Gabaix, Laibson, Moloche and Weinberg (2006) directed cognition model to predict that consumers will behave as if the current decision in a sequence is practically their last (despite the fact that in our experiments it is obvious that subsequent decisions will follow). Consequently, in our setting consumers “overspend” their capacity early in the configuration sequence, leaving them with fewer resources to assess their utility from subsequent attributes in the sequence. In product customization decisions these three premises can conspire to produce inconsistent choices. More specifically, as with self-control encounters, we suggest that the effort invested in previous attribute decisions affects subsequent attribute decisions because the previous decisions deplete people’s capacity to evaluate options. Here, however, depletion is a function of not only the number of decision “encounters” (i.e., attribute decisions) the consumer has undertaken, but also the number of options that she had to evaluate at each stage. We focus on the combined effect of these two factors, and how they influence revealed preferences. Our thesis is that early decisions in a customization sequence affect subsequent decisions in the sequence because the early decisions deplete people’s mental capacity, but that this depletion effect depends upon whether or not the early decisions involve attributes that are high in number of options (high variety) or low in number of options (low variety). People’s depleted capacity may heighten the difficulty—and sometimes also reduce the likelihood—of finding any option to be above their minimum utility threshold and hence to be chosen. Such an experience of “choice overload” can prompt people to forgo making a choice altogether or, when avoidance is not a practical or possible alternative to making a choice, it can prompt them to embrace options that are simple and easier to understand (Iyengar and Lepper 2000; Iyengar and Kamenica 2007). The simplifying strategy that we focus on in our experiments is people’s likelihood of accepting the default alternative for a given decision in the sequence. Defaults simplify choice because they reduce decision effort and can sometimes be interpreted as options that are endorsed by the firm or policy-maker and their influence on revealed preferences is pervasive (Johnson and Goldstein 2003). As mentioned earlier, our experimental treatment manipulates the configuration process such that the attributes with a greater number of options come first in the sequence and are followed by the attributes with a smaller number of options or vice versa. Normatively the sequence should not affect choices or willingness to pay; the same preference should be revealed irrespective of the sequence. If, however, choices are sensitive to the stock of capacity to evaluate options, then each sequence should yield different revealed preferences because decision makers will be depleted at different parts of the sequence depending on the experimental condition. In particular, we predict that people who encounter high variety, depleting choices early in the sequence will evince a tendency to accept the default alternative in subsequent decisions even if these decisions involve relatively few options that would ordinarily require less capacity to evaluate. In contrast, those who begin the sequence with less complex decisions offering fewer options to choose from will evince little effect of depletion later in a sequence, even if these subsequent decisions are of the complex, high variety sort. This differential depletion pattern provides firms with an opportunity to extract higher revenues from their customers by manipulating the order in which firms present product attributes and the option that they select as the default alternative. We conduct our empirical tests of depletion and its consequences in three field experiments involving financially consequential choices: custom made men’s suits and automobiles.