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Consumer Protection and Contingent Charges

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  • Mark Armstrong
  • John Vickers

Abstract

Contingent charges for financial services, such as fees for unauthorized overdrafts, are often controversial. We study the economics of contingent charges in a stylized setting with naive and sophisticated consumers. We contrast situations where the naive benefit from the presence of sophisticated consumers with situations where competition works to subsidize the sophisticated at the expense of the naive, arguably unfairly. The case for regulatory intervention in these situations depends in good part, but not only, on the weight placed on distributional concerns. The economic and legal issues at stake are well illustrated by a case on bank charges recently decided by the U.K. Supreme Court. (JEL D14, D18, G21, G28, L51)

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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Literature.

Volume (Year): 50 (2012)
Issue (Month): 2 (June)
Pages: 477-93

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Handle: RePEc:aea:jeclit:v:50:y:2012:i:2:p:477-93

Note: DOI: 10.1257/jel.50.2.477
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References

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  1. Victor Stango & Jonathan Zinman, 2011. "Limited and varying consumer attention: evidence from shocks to the salience of bank overdraft fees," Working Papers 11-17, Federal Reserve Bank of Philadelphia.
  2. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(2), pages 197-207, April.
  3. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  4. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Consumer Protection and the Incentive to Become Informed," Journal of the European Economic Association, MIT Press, MIT Press, vol. 7(2-3), pages 399-410, 04-05.
  5. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(2), pages 156-168, June.
  6. Schwartz, Alan & Wilde, Louis L., 1983. "Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 480, California Institute of Technology, Division of the Humanities and Social Sciences.
  7. Kosfeld, Michael & Schüwer, Ulrich, 2011. "Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education," IZA Discussion Papers 6061, Institute for the Study of Labor (IZA).
  8. Victor Stango & Jonathan Zinman, 2009. "What Do Consumers Really Pay on Their Checking and Credit Card Accounts? Explicit, Implicit, and Avoidable Costs," American Economic Review, American Economic Association, American Economic Association, vol. 99(2), pages 424-29, May.
  9. Francesco Squintani & Alvaro Sandroni, 2007. "Overconfidence, Insurance and Paternalism," Economics Discussion Papers, University of Essex, Department of Economics 643, University of Essex, Department of Economics.
  10. Spiegler, Ran, 2011. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195398717, October.
  11. Stefano DellaVigna & Ulrike Malmendier, 2006. "Paying Not to Go to the Gym," American Economic Review, American Economic Association, American Economic Association, vol. 96(3), pages 694-719, June.
  12. Michael D. Grubb, 2012. "Consumer Inattention and Bill-Shock Regulation," Boston College Working Papers in Economics, Boston College Department of Economics 828, Boston College Department of Economics.
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Cited by:
  1. Nick Vikander, 2014. "Sellouts, Beliefs, and Bandwagon Behavior," Discussion Papers 14-15, University of Copenhagen. Department of Economics.
  2. Kosfeld, Michael & Schüwer, Ulrich, 2014. "Add-on pricing in retail financial markets and the fallacies of consumer education," SAFE Working Paper Series 47, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  3. Wenzel, Tobias, 2013. "Consumer myopia, competition and the incentives to unshroud add-on information," DICE Discussion Papers 126, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  4. Wenzel, Tobias, 2014. "Consumer myopia, competition and the incentives to unshroud add-on information," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 98(C), pages 89-96.
  5. John Ashton & Andros Gregoriou, 2014. "The role of implicit costs and product quality in determining the customer costs of using personal current accounts," Working Papers 14001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  6. Mark Armstrong, 2014. "Search and Ripoff Externalities," Economics Series Working Papers 715, University of Oxford, Department of Economics.

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