Behavioral consumer theory

1
Behavioral consumer theory

• How should firms profit-max with behavioral
  consumers?
• Procrastinating consumers
• Blockbusterhuge 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 moviesbut dont
  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 ß-d?
• Rebates
• Consumers plan to cash in rebates, only 15 do so
• Pricing illusions
• 10 CDs for .01relies on laziness in sending
  back CDsshipping 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 (?) toward loss of money or goods
  (value v)
• Timing
• Firms .consumerprice p, cost
  c.shock..
• pick F(p)forms beliefs..realized.consu
  mer 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 dont 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 (1930s econ) to
  explain sticky pricesbut 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