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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 e ect 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.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 828.

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Date of creation: 03 Jul 2012
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Handle: RePEc:boc:bocoec:828

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Related research

Keywords: inattention; bill shock; consumer protection; bias; cellular; overdraft;

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References

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  1. Aaron S. Edlin and Chris Shannon., 1995. "Strict Monotonicity in Comparative Statics," Economics Working Papers 95-238, University of California at Berkeley.
  2. Miao, Chun-Hui, 2010. "Consumer myopia, standardization and aftermarket monopolization," European Economic Review, Elsevier, vol. 54(7), pages 931-946, October.
  3. Spiegler, Ran, 2011. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780195398717, September.
  4. Laibson, David I. & Gabaix, Xavier, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
  5. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  6. Courty, Pascal & Li, Hao, 2000. "Sequential Screening," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 697-717, October.
  7. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-63, February.
  8. Michael D. Grubb, 2009. "Selling to Overconfident Consumers," American Economic Review, American Economic Association, vol. 99(5), pages 1770-1807, December.
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Cited by:
  1. Mark Armstrong & John Vickers, 2012. "Consumer Protection and Contingent Charges," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 477-93, June.

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