52 Pages Posted: 17 Jan 2012 Last revised: 27 Mar 2013
Date Written: July 5, 2012
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.
Keywords: nonlinear pricing, dynamic, inattention, bill shock, cellular, overdraft
JEL Classification: D43, D86, D18, L1, D11
Suggested Citation: Suggested Citation
Grubb, Michael D., Consumer Inattention and Bill-Shock Regulation (July 5, 2012). MIT Sloan Research Paper No. 4987-12. Available at SSRN: https://ssrn.com/abstract=1983518 or http://dx.doi.org/10.2139/ssrn.1983518