Behavioural Price Discrimination

what are the conditions needing to hold for the rational preference based model to hold?

• consumers are fully rational.

• no naivete or behavioural bias.

• consumers differ in valuations.

• consumers choose the contract that maximises their utility.

what is the model setup for preference based?

consumers differ in valuations: high demand low demand.

the firm cannot see type, they must design a menu.

participation and incentive compatability constraints must hold.

what does the prefence based model contracts look like under full information?

high type.

high fixed fee equal to their willingness to pay.

efficient usage fee.

no screening.

low type

low fixed fee.

efficient usage fee.

no screening.

extracts full surplus.

what is the screening process involved when serving both types?

low type gets zero surplus. there fixed fee is kept low and they are not effected by the higher usage fee.

set a high usage fee, makes the low-demand contract unattractive.

makes high demand type choose their contract.

reduced fixed fee for high type, high type gets positive surplus (information rent). otherwise they would pretend to be low type.

what process is taken when serving only high demand consumers?

• exclude low demand consumers so they don’t have to pay information rent.

• set a high fixed fee which is unachievable to low demand consumers.

• high demand consumer pays their exact willingness to pay. Set an efficient usage fee.

• exclusion is efficient but reduces coverage.

what is naivete?

• misprediction of one’s future behaviour.

• underestimation of future usage.

what is the difference between sophisticated and naive consumers?

sophisticated - correctly predict their future behaviour.

naive - believe they will behave perfectly, but they don’t.

what are the components of the bank’s contract?

• salient upfront fee.

• shrouded usage fee.

what happens when the firm has perfect information?

firm offers different contracts to each type.

• firm cannot trick sophisticated. high upfront byt efficient usage fee. zero surplus.

• firms exploit naive by offering bait and switch.

• targeted exploitation.

what happens under competition with naive consumers?

• firms compete on perceived utility.

• they offer negative upfront to attract consumers.

• they recover with very high shrouded fees.

why does competition not protect naive consumers?

• naive consumers fund the entire competitive race.

• naive consumers subsidise sophisticated consumers.

what occurs under uniform naivete pricing? what is the benefit to sophisticated + naive?

• firms must keep the overdraft fee moderate to avoid scaring off sophisticated consumers.

• naive benefit from this.

what does the paradox of information do?

• firms can now perfectly target naive consumers.

• they remove the pooling that previously protected them.

• naive consumers face maximal exploitation.

• sophisticated consumers lose the entry bonus.