Abstract
Applied economics studies of market failure have traditionally focused on the nature of commodities (e.g., public goods) or the conduct of sellers (e.g., oligopoly), treating consumers as passive price-takers. In recent decades, behavioural economists have studied consumer decision-making, identifying cognitive inconsistencies adverse to self-interest, but for the most part have not focused on the market consequences of consumer conduct. In practice, consumer decisions are based on perceptions and beliefs formed from experience and current market information, and influencers in the consumer’s social network. When inconsistencies in perceptions are systemic, they can influence market outcomes and attract the attention of counterparties with stakes in these outcomes.
Much of contemporary market science is concerned with identifying attention and diligence failures in consumer decision-making and giving sellers tools that amplify these failures to the sellers’ advantage. The replacement of personal influencers and information sources with digital sources, social media, and personalized artificial influencers has introduced new forms of market failure arising from information overload, inattention, and misdirection.
This lecture addresses the vulnerabilities of consumer decision-makers, the market consequences of their exploitation by sellers, and the problem of establishing market guardrails to control these failures. Two empirical studies find outside market effects from the inattention of small shares of consumers.
