Consumer Inattention and Bill-Shock Regulation
Michael D. Grubb
July 5, 2012
MIT Sloan Research Paper No. 4987-12
For many goods and services, such as cellular-phone service and debit-card transactions, the price of the next unit of service depends on past usage. As a result, consumers who are inattentive to their past usage but are aware of contract terms may remain uncertain about the price of the next unit. I develop a model of inattentive consumption, derive equilibrium pricing when consumers are inattentive, and evaluate bill-shock regulation requiring firms to disclose information that substitutes for attention. When inattentive consumers are heterogeneous and unbiased, bill-shock regulation reduces social welfare in fairly-competitive markets, which may be the effect of the FCC's recent bill-shock agreement. If inattentive consumers underestimate their demand, however, then bill-shock regulation can lower market prices and protect consumers from exploitation. Hence the Federal Reserve's new opt-in rule for debit-card overdraft protection may substantially benefit consumers.
Number of Pages in PDF File: 52
Keywords: nonlinear pricing, dynamic, inattention, bill shock, cellular, overdraft
JEL Classification: D43, D86, D18, L1, D11
Date posted: January 17, 2012 ; Last revised: March 27, 2013
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