Biased Beliefs of Consumers and Two-Part Tariff Competition

This paper explores how firms respond in designing two-part tariffs to consumers' biased beliefs about their preferences. Biased consumers could be either overpessimistic when they underestimate their true demand or overoptimistic when they overestimate. Assuming that unbiased consumers consist of two types with high and low valuations, I show that the effect of the presence of biased consumers on unbiased consumers depends on market structure. The monopolist wants to educate overpessimistic consumers while may not want to educate overoptimistic consumers. Alternatively, in competition, firms do not have the incentive to educate any biased consumers. A debiasing policy for either overpessimistic or overoptimistic consumers unambiguously improves social welfare in competition but could harm social welfare in monopoly.