Informing Consumers about Themselves

Abstract

Consumers make mistakes. Imperfect information and imperfect rationality lead to misperception of benefits and costs associated with a product. As a result consumers might fail to maximize their preferences in product choice or product use. A proposed taxonomy of consumer mistakes draws attention to a less-studied category of mistakes: use-pattern mistakes - mistakes about how the consumer will use the product. Use-pattern mistakes are prevalent. Sellers respond strategically to use-pattern mistakes by redesigning their products, contracts and pricing schemes. These strategic, design responses often exacerbate the welfare-costs associated with consumer mistakes. From a policy perspective, focusing on disclosure regulation, the importance of use-pattern mistakes requires more, and better, use-pattern disclosure. In particular, sellers should be required to provide individualized use-pattern information.