Welfare Improving Discrimination based on Cognitive Limitations
AbstractThis paper is concerned with the situation in which a profit-maximizing monopolist faces consumers that are diverse not only in their preferences but also in their levels of bounded rationality. The behavioral phenomenon considered here is the attraction effects when choices are made across categories. Using the standard second-degree price discrimination model, the optimal menu of contracts that screens consumers' types is characterized. The benefit of discriminating consumers based on their preference and cognitive limitation is always higher than its cost. In other words, the monopolist can exploit consumers and increase his profit with this contract. The model provides a possible explanation for the apparent puzzle why one may observe that the same quality products are priced differently under different labels. Moreover, this contract is welfare improving.
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Bibliographic InfoPaper provided by Bielefeld University, Center for Mathematical Economics in its series Working Papers with number 495.
Length: 27 pages
Date of creation: Dec 2013
Date of revision:
bounded rationality; attraction effect; contract design; welfare;
Find related papers by JEL classification:
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D60 - Microeconomics - - Welfare Economics - - - General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-01-17 (All new papers)
- NEP-COM-2014-01-17 (Industrial Competition)
- NEP-CTA-2014-01-17 (Contract Theory & Applications)
- NEP-MIC-2014-01-17 (Microeconomics)
- NEP-NEU-2014-01-17 (Neuroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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