Research & Working Papers

Supplementary Material

Abstract:

In many deceptive markets, firms design contracts to exploit mistakes of naive consumers. These contracts also attract less profitable sophisticated consumers. I study such markets when firms compete repeatedly and gather usage data about their customers which is informative about the likelihood of a customer being sophisticated. I show in a benchmark model that firms do not benefit from private information in this setting when all consumers are rational. I find that in sharp contrast to a model with only rational consumers, this customer information mitigates competition and is of great value to its owner despite intense competition. I discuss several implications of the value of customer information on naivete. Private information on customers' sophistication induces profits that are bell-shaped in the share of naive consumers. Firms prefer an even mix of both customer types. I also show that if firms can educate (some) naives about hidden fees, competition is already mitigated when firms compete for customers with initially symmetric information. I analyze a policy that discloses customer information to all firms and thereby increases consumer surplus. I discuss how the UK governments' midata program might induce crucial aspects of this policy, and illustrate the robustness of results through several extensions.


         (Earlier title: Screening Procrastinators with Automatic-renewal Contracts)

Web Appendix


Abstract:

Automatic contract renewals are a common feature in consumer markets and a frequent concern among policymakers. They can be used to exploit consumer inertia when consumers forgo benefits from switching to better alternatives. I study limited attention as a source for this inertia, and investigate robustness to present bias in extensions. In both cases, I study how firms can use contract renewal to sell to consumers with different degrees of inertia. Monopolists optimally distort automatic-renewal contracts to exploit inertia of consumers. However, the more a monopolist designs contracts to exploit inertia, the higher are the benefits to more sophisticated consumers who take advantage of these offers by not procrastinating. This adverse-selection problem forces monopolists to focus less on exploiting inert consumers, leading to fewer consumer mistakes. Adverse selection can induce monopolists to offer more efficient contracts. I show that adverse selection might not occur with competition, and that competitive firms focus more on exploitation. Competitive firms frequently offer less efficient contracts. Indeed, with limited attention, competition leads to larger renewal prices and more back-loaded pricing. I discuss implications for teaser rates and evaluate recent policies on automatic-renewal contracts in the USA and the UK, such as reminders and increased salience of automatic-renewal features.



Abstract:

We study traffic congestion as a mechanism design problem by analyzing the allocation of a set of drivers among two roads, one of which may be congested. With a finite number of drivers setting a single Pigouvian price is not optimal because the efficient allocation is unknown ex ante. We show that efficiency is implementable with a Vickrey-Clarke-Groves payment rule. If the number of drivers becomes large, a single Pigouvian price becomes efficient. Our mechanism correctly sets this price without knowing the precise distribution of the value of travel time. We also characterize revenue-maximizing mechanisms and study extensions.


Abstract:

We identify a novel competition-policy-based argument for regulating the secondary features of complex or complexly-priced products when consumers have limited attention. We study a market in which each firm chooses two price components, a headline price and an additional price, and a consumer can either fully understand the offer of one firm (studying), or look at only the headline prices of two firms (browsing). Regulations capping the additional price or standardizing conditions under which the additional price can be charged lower prices and increase consumer welfare in a variety of environments. The core mechanism is simple: because consumers do not need to worry about regulated features, they can devote more attention to browsing, enhancing competition. Extending our model to multiple markets, we show that the benefits of regulating one market may manifest themselves in other markets, and that in order to have a non-trivial pro-competitive effect, the regulations in question must be sufficiently broad in scope. As an auxiliary positive prediction, we show that because low-value consumers are often more likely to study than high-value consumers, the average price consumers pay can be increasing in the share of low-value consumers. This prediction helps explain why a number of essential products are more expensive in lower-income neighborhoods.


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Johannes Johnen,
23.04.2018, 03:14
Ċ
Johannes Johnen,
23.04.2018, 03:13
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Johannes Johnen,
02.08.2018, 02:38
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Johannes Johnen,
02.08.2018, 02:24
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Johannes Johnen,
25.06.2018, 02:54
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Johannes Johnen,
25.06.2018, 02:55
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