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Why firms’ exploitation of consumer myopia may benefit myopic consumers

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  • Zenger, Hans

Abstract

Myopic consumers underestimate the likelihood with which they will require follow-on services for products they purchase. Firms have an incentive to exploit this behavioral bias by skewing their price structure toward high add-on charges. Inadvertently, this skewed price structure provides myopic consumers with a monetary incentive mechanism that tends to inhibit, rather than propel, inefficient consumption decisions.

Suggested Citation

  • Zenger, Hans, 2013. "Why firms’ exploitation of consumer myopia may benefit myopic consumers," Economics Letters, Elsevier, vol. 118(2), pages 307-309.
    • Handle: RePEc:eee:ecolet:v:118:y:2013:i:2:p:307-309
    DOI: 10.1016/j.econlet.2012.10.031
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    References listed on IDEAS

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    1. Stefano DellaVigna & Ulrike Malmendier, 2004. "Contract Design and Self-Control: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(2), pages 353-402.
    2. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    4. de Meza, David & Reyniers, Diane, 2012. "Every shroud has a silver lining: The visible benefits of hidden surcharges," Economics Letters, Elsevier, vol. 116(2), pages 151-153.
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    Cited by:

    1. Shelle Santana & Steven K. Dallas & Vicki G. Morwitz, 2020. "Consumer Reactions to Drip Pricing," Marketing Science, INFORMS, vol. 39(1), pages 188-210, January.
    2. Irina Baye & Geza Sapi, 2020. "Consumer foresight, customer data, and investment in targeting technology," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(4), pages 363-386, September.
    3. Marco Savioli & Lorenzo Zirulia, 2020. "Does add-on presence always lead to lower baseline prices? Theory and evidence," Journal of Economics, Springer, vol. 129(2), pages 143-172, March.
    4. Marco Savioli & Lorenzo Zirulia, 2015. "Add-On Pricing: Theory and Evidence From the Cruise Industry," Working Paper series 15-26, Rimini Centre for Economic Analysis, revised May 2016.
    5. Heidhues, Paul & Köszegi, Botond, 2018. "Behavioral Industrial Organization," CEPR Discussion Papers 12988, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Consumer myopia; Pricing; Add-ons;
    All these keywords.

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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