Consumer Inattention and Bill-Shock Regulation

For many goods and services, such as cellular-phone service and debit-card transactions, the price of the next unit of service depends on past usage. As a result, consumers who are inattentive to their past usage but are aware of contract terms may remain uncertain about the price of the next unit. I develop a model of inattentive consumption, derive equilibrium pricing when consumers are inattentive, and evaluate bill-shock regulation requiring firms to disclose information that substitutes for attention. When inattentive consumers are heterogeneous and unbiased, bill-shock regulation reduces social welfare in fairly-competitive markets, which may be the effect of the FCC’s recent bill-shock agreement. If inattentive consumers underestimate their demand, however, then bill-shock regulation can lower market prices and protect consumers from exploitation. Hence the Federal Reserve’s new opt-in rule for debit-card overdraft protection may substantially benefit consumers. ∗A previous version of this paper circulated under the title ”Bill Shock: Inattention and Price-Posting Regulation”. I thank Heski Bar-Isaac, Allesandro Bonatti, Glenn Ellison, Bob Gibbons, Ginger Jin, Bob Pindyck, and Tavneet Suri for careful reading and many helpful comments and suggestions. †MIT Sloan School of Management. [email protected], www.mit.edu/ ̃mgrubb.