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Consumer Inattention and Bill-Shock Regulation

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  • Michael D. Grubb

    (Boston College)

Abstract

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.

Suggested Citation

  • Michael D. Grubb, 2012. "Consumer Inattention and Bill-Shock Regulation," Boston College Working Papers in Economics 828, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:828
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    References listed on IDEAS

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    More about this item

    Keywords

    inattention; bill shock; consumer protection; bias; cellular; overdraft;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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