Less Choice is Better, Sometimes

Psychological experiments have revealed that more choice does not always make one better off. For example, consumers are sometimes more likely to purchase a product from a small variety than a large variety. Some have suggested that this excessive-choice effect may have implications for how well markets serve society. This paper constructs an economic model where the excessive-choice effect results from search costs. The model shows that it is possible for markets to produce too much variety, but there are also incentives inducing markets to provide an optimal variety. Advertising, retailer market power, and slotting fees are not just signs of imperfect competition, but mechanisms of ensuring consumers are presented with an ideal choice set.