Behavioural Price Discrimination

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 are the conditions under the rational preference based model?

• the firm charges the efficient usage fee.

• the firm charges a high fixed fee.

• efficient and not exploitative.

• there is no hidden fee.

what happens to the naive consumers welfare?

• they get negative actual utility.

• they sign thinking they get zero surplus, but end up worse off.

what happens to the sophisticated consumes welfare?

they get zero surplus. they avoid the trap.

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.