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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

    as
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    Cited by:

    1. Adams, Robert M., 2017. "Bank Fees, Aftermarkets, and Consumer Behavior," Finance and Economics Discussion Series 2017-054, Board of Governors of the Federal Reserve System (U.S.).
    2. Friesen, Lana & Earl, Peter E., 2015. "Multipart tariffs and bounded rationality: An experimental analysis of mobile phone plan choices," Journal of Economic Behavior & Organization, Elsevier, vol. 116(C), pages 239-253.
    3. Mark Armstrong & John Vickers, 2012. "Consumer Protection and Contingent Charges," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 477-493, June.
    4. repec:eee:indorg:v:54:y:2017:i:c:p:239-268 is not listed on IDEAS
    5. Mark Armstrong, 2015. "Search and Ripoff Externalities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 273-302, November.
    6. Michel, Christian, 2016. "Market Regulation of Voluntary Add-on Contracts," Annual Conference 2016 (Augsburg): Demographic Change 145892, Verein für Socialpolitik / German Economic Association.
    7. Einav, Liran & Finkelstein, Amy & Schrimpf, Paul, 2017. "Bunching at the kink: Implications for spending responses to health insurance contracts," Journal of Public Economics, Elsevier, vol. 146(C), pages 27-40.
    8. Michael D. Grubb, 2015. "Overconfident Consumers in the Marketplace," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 9-36, Fall.
    9. Paul Heidhues & Botond Kőszegi, 2015. "On the Welfare Costs of Naiveté in the US Credit-Card Market," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 341-354, November.
    10. Cheney, Julia S. & Hunt, Robert M. & Mikhed, Vyacheslav & Ritter, Dubravka & Vogan, Michael, 2014. "Identity theft as a teachable moment," Working Papers 14-28, Federal Reserve Bank of Philadelphia.
    11. Ran Spiegler, 2015. "On the Equilibrium Effects of Nudging," The Journal of Legal Studies, University of Chicago Press, vol. 44(2), pages 389-416.
    12. Michael Grubb, 2015. "Behavioral Consumers in Industrial Organization: An Overview," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 247-258, November.
    13. Michael D. Grubb, 2015. "Behavioral Consumers in Industrial Organization," Boston College Working Papers in Economics 879, Boston College Department of Economics.
    14. Michael Grubb, 2015. "Failing to Choose the Best Price: Theory, Evidence, and Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 303-340, November.
    15. Amanda Starc & Robert J. Town, 2015. "Internalizing Behavioral Externalities: Benefit Integration in Health Insurance," NBER Working Papers 21783, National Bureau of Economic Research, Inc.
    16. Liran Einav & Amy Finkelstein & Paul Schrimpf, 2016. "Bunching at the Kink: Implications for Spending Responses to Health Insurance Contracts," NBER Chapters,in: Social Insurance Programs (Trans-Atlantic Public Economic Seminar - TAPES) National Bureau of Economic Research, Inc.
    17. Elizabeth Bailey, 2015. "Behavioral Economics and U.S. Antitrust Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 355-366, November.
    18. Robert Dur & Ben Vollaard, 2013. "Salience of Law Enforcement: A Field Experiment," Tinbergen Institute Discussion Papers 17-007/VII, Tinbergen Institute.
    19. Kfir Eliaz & Ran Spiegler, 2015. "Beyond “Ellison’s Matrix”: New Directions in Behavioral Industrial Organization," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 259-272, November.
    20. Justin P. Johnson, 2017. "Unplanned Purchases and Retail Competition," American Economic Review, American Economic Association, vol. 107(3), pages 931-965, March.

    More about this item

    Keywords

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

    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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