Manipulation has many shades. While it is a staple of almost every human interaction, it is particularly prevalent in consumer markets, where firms promote their business by diverting people’s attention, shifting their preferences, influencing their beliefs and otherwise affecting their choices. All without lying, which makes it doubly difficult for the law to prohibit.
Most, if not all, literature focuses on manipulation that takes advantage of people’s irrationality—on firms’ exploitation of people’s mistakes and misjudgments. In our new working paper, we identify a different source of manipulation, which relies solely on how truthful information is prioritized. This type of manipulation is effective even against rational consumers, and—surprisingly—it could also arise in an unintended fashion from the warnings and disclosures that lawmakers mandate.
The key assumption we make is that products are sufficiently complex that consumers cannot, or rationally choose not to, become fully informed about all the dimensions. Because of this limited capacity, the way in which sellers prioritize the information, voluntarily or by legal mandate, matters.
Consumers want to reserve their attention to the product dimensions that have the greatest impact on their welfare. For some products, it is critical for them to know that there are some low-quality dimensions because the presence of such dimensions undermines the value of the product as a whole, even in the presence of other high-quality attributes. For other products, their interest is reversed: it is critical for them to know that there are some high-quality dimensions, and it matters less to them that these high-quality aspects are accompanied by other, low-quality dimensions.
The first category of products—where low-quality dimensions matter more—includes products with dimension of quality that could be loosely characterized as complements. The value from such products is significantly reduced if either of the critical dimensions is low. For example, when people purchase a vacation package in a resort, several dimensions are critical. If their suite is shabby, if the food is bad, if the service is poor, if the pool is out of order—each of these dimensions can single-handedly destroy much of the benefit from the vacation. Before they purchase a vacation package, it is important for consumers to know that none of the critical dimensions are low quality. If there is such a low dimension, consumers want information about it to be prioritized. Sellers, however, prefer to de-prioritize the information about low-quality dimensions and highlight instead the high-quality ones. Technically, sellers are not misleading buyers, nor falsely implying that other dimensions are high. They are ‘only’ choosing to prioritize some information—information that maximizes their profits—knowing that consumers would have preferred to receive other information. Legal intervention could solve the problem by requiring that sellers prioritize the disclosure of the low-quality dimensions. This is a Warning regime.
But there is a second category of products, for which the Warning regime can do more harm than good. Here, the dimensions of quality are not complements but instead are loosely characterized as substitutes. If one of the product dimensions is high quality, it matters little to consumers that other dimensions are low. Accordingly, it is more important for consumers to turn their attention to the presence of high-quality dimensions. For example, a visit to a theme park or a restaurant could be greatly satisfying even if some of the rides or menu items are low-quality, as long as others are high. Consumers’ interest is to be told about the high-quality aspects, which is also what sellers want to prioritize, and accordingly the problem of manipulation by mislaid priorities does not arise. But distortions do arise if the law steps in to mandate that sellers prioritize the low-quality dimensions. If the Warning regime, devised to address manipulation in the complements scenario, is extended to the substitutes scenario—if, that is, the law requires prominent warnings of the low-quality dimensions even when consumers prefer to direct their attention to high-quality dimensions—consumers’ ability to attend to the most critical information and to make optimal purchase decisions would be frustrated.
We show that the distortions arising from sellers’ mislaid disclosure priorities in the complements case mirror the distortions arising from lawmakers’ mislaid disclosure mandates in the substitutes case. We are accustomed to thinking of sellers’ selective disclosure of high-quality dimensions as manipulative and harmful, and of lawmakers’ mandates that low dimensions be warned against as protective and helpful. Our analysis shows that this instinctive view is valid only for the first category of products—when it is more important for consumers to know about low-quality dimensions. When, instead, it is more important for them to know about high-quality dimensions, sellers’ unregulated disclosures are in fact helpful and well-prioritized, whereas warning mandates are harmful.
Our analysis of manipulation by mislaid disclosure priorities informs the optimal design of legal interventions. First, warnings should be used for some products but not all. They are helpful when product dimensions are complements, yet harmful when the dimensions are substitutes. Second, the value of warnings depends also on the product’s price. A Warning regime is more valuable for high-priced products, where consumers are more likely to experience post-purchase regret due to the presence of undisclosed low-quality dimensions. Third, we show that a legal regime of Full Disclosure, which requires unprioritized disclosure of all quality dimensions, is never optimal because it is never effective in alerting consumers to the dimensions they care about most. Put differently, we formally establish one reason why a legal mandate to disclose more information could backfire.
Oren Bar-Gill is the William J. Friedman and Alicia Townsend Friedman Professor of Law and Economics at Harvard Law School.
Omri Ben-Shahar is the Leo and Eileen Herzel Professor of Law and Kearney Director of the Coase-Sandor Institute for Law and Economics at the University of Chicago Law School.