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Behavioral consumer theory

Behavioral consumer theory. How should firms profit-max with behavioral consumers? Procrastinating consumers Blockbuster…huge profit from late fees, forecasting error + loss-aversion? Credit card “teaser rates” (Ausubel AER 91?) Only 70% pay off balance, average household balance $5,000

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Behavioral consumer theory

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  1. Behavioral consumer theory • How should firms profit-max with behavioral consumers? • Procrastinating consumers • Blockbuster…huge profit from late fees, forecasting error + loss-aversion? • Credit card “teaser rates” (Ausubel AER 91?) • Only 70% pay off balance, average household balance $5,000 • Netflix– pay a monthly fee for movies…but don’t get around to watching them!  Per movie fee may be large • Health clubs (Della Vigna & Malmendier, 04) • Pay $17/visit through annual fees vs $10/visit

  2. Behavioral consumer theory • How should firms behave with lifelike consumers? II • Price discrimination through impatience • Discriminate by demand based on impatience • Movie openings (Star Wars) • Similar to conventional price discrimination but comes from β-δ? • Rebates • Consumers plan to cash in rebates, only 15% do so • Pricing illusions • “10 CD’s for $.01”…relies on laziness in sending back CD’s+shipping fees • When does competition eliminate behavioral demand effects? • A: Depends on consumer forecasting of future mistakes • Is there more profit in exploiting mistakes or correcting mistakes? • Political regulation vs firm competition to help consumers • E.g., “cooling off” laws, price gouging, class action (Blockbuster)

  3. Loss-aversion & pricing(Heidhues & Koszegi, 04) • Personal equilibrium(Rabin & Koszegi 04): • Consumers create reference point (matches expected purchase) • Loss-averse (λ) toward loss of money or goods (value v) • Timing • Firms …….consumer………price p, cost c….shock……………………….. pick F(p)…forms beliefs……..realized…………………….consumer buys • Shock h(w) to consumer value unique-fies demand (Prop 2) • Price stickiness (Prop 3) • For substantial loss-aversion, firms choose discrete prices • Prices don’t vary smoothly with cost c (surprising) • “menu costs” empirics, Kayshap et al QJE 02? • Intuition: At a price p, consumers dislike foregoing a lower price; incentivizes firms to lump prices together • Cf. “kinked” demand curve (1930’s econ) to explain sticky prices…but in this model it is derived endogeneously • Countercyclical markups (shrink in booms, grow in busts) • Explains puzzle of fixed consumer prices and wages shortages in recession, excess supply in booms

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