Consumer Inattention and Bill-Shock Regulation

Grubb, Michael D.

doi:10.1093/restud/rdu024

Cited by 104 publications

(47 citation statements)

References 34 publications

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“…For instance, an overconfident consumer may overestimate the likelihood of remembering to mail in a rebate. Firms have an incentive to complicate their contracts with precisely those terms that consumers overestimate their own abilities to navigate (for example, DellaVigna and Malmendier 2004;Gilpatric 2009;Holman and Zaidi 2010;Grubb 2015a).…”

Section: Firms Complicate Contracts To Exploit Overconfidencementioning

confidence: 99%

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Overconfident Consumers in the Marketplace

Grubb

2015

Journal of Economic Perspectives

117

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When consumers sign contracts, expectations about future usage of the product or service matter. For instance, the value provided by car insurance depends on how likely a consumer believes she is to file a claim; the value provided by a gym membership depends on how often a consumer anticipates going to the gym; and the value provided by a cellular phone contract depends on how many gigabytes of data a consumer anticipates using. The standard modeling paradigm makes the expedient assumption that consumers have rational expectations. Imposing rational expectations drastically simplifies models and eliminates the need to directly measure beliefs as they coincide with the distribution of observed outcomes. Yet a large literature shows that consumer beliefs often deviate substantially from rational expectations in systematic ways. This has important consequences for contract design, firm profits, consumer welfare, and public policy.The term overconfidence is used broadly in the psychology literature, referring to both overoptimism and overprecision. Overoptimistic individuals overestimate their own abilities or prospects, either in absolute terms or in comparison to others. In contrast, overprecise individuals place overly narrow confidence intervals around forecasts, thereby underestimating uncertainty. These biases can lead consumers to misforecast their future product usage, or to overestimate their abilities to navigate contract terms. In consequence, consumer overconfidence causes consumers

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Section: Firms Complicate Contracts To Exploit Overconfidencementioning

confidence: 99%

“…Consumers who are overoptimistic about their attention levels will underestimate the likelihood of paying surprise penalty fees but overestimate the likelihood of collecting surprise loyalty discounts. In either case, consumers overvalue contracts with attention hurdles to firms' benefit (Grubb 2015a). More examples are shown in Table 4.…”

Section: Sourcementioning

confidence: 99%

Overconfident Consumers in the Marketplace

Grubb

2015

Journal of Economic Perspectives

117

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“… Bill-shock regulation (Grubb, 2015) requires firms to "disclose information that substitutes for attention" on the grounds that information and attention (to past usage, size of bills) are substitutes. It is based on the notion that consumers have different degrees of sophistication.…”

Section: Consumer Segmentationmentioning

confidence: 99%

“…Bill-shock regulation makes a provision whereby these naïve consumers are alerted when they cross some predetermined thresholds as stipulated in the contract. Grubb (2015) argues that bill-shock regulation can increase social welfare and can benefit consumers by reducing cross-subsidisation of the inattentive consumers by attentive consumers. Its application to DR contracts has yet to be explored.…”

Section: Consumer Segmentationmentioning

confidence: 99%

Demand-Side Flexibility for Energy Transitions: Policy Recommendations for Developing Demand Response

Nursimulu

2016

SSRN Journal

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“…They give firms incentives to distort price vectors in particular ways, but in a market with a constant pass-through rate of 1, no change in total markups results (Grubb, 2015b). 23 For instance, Grubb (2015a) shows that if inattentive consumers accrue them late in life. With a zero flow fee the direction of the cross-subsidy would be reversed.…”

Section: Application: Mexico's Private Social Security Marketmentioning

confidence: 99%

Failing to Choose the Best Price: Theory, Evidence, and Policy

Grubb

2015

Rev Ind Organ

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Both the "law of one price" and Bertrand's (1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and then show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons difficult and soften competition. Possible regulatory interventions include simplifying the choice environment, for instance by restricting price to be a scalar, advising consumers of their expected costs under each option, or choosing on behalf of consumers. * Boston College, michael.grubb@bc.edu, https://www2.bc.edu/michael-grubb/. I am grateful to Mark Armstrong, Ben Handel, and Rani Spiegler for careful reading and many helpful comments on an earlier draft. I also thank Vera Sharunova for her excellent research assistance.

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Consumer Inattention and Bill-Shock Regulation

Cited by 104 publications

References 34 publications

Overconfident Consumers in the Marketplace

Overconfident Consumers in the Marketplace

Demand-Side Flexibility for Energy Transitions: Policy Recommendations for Developing Demand Response

Failing to Choose the Best Price: Theory, Evidence, and Policy

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