Biased Beliefs of Consumers and Two-Part Tariff Competition

Koji Ishibashi
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Koji Ishibashi: Department of Economics, Keio University

No 2024-009, Keio-IES Discussion Paper Series from Institute for Economics Studies, Keio University

Abstract: This paper explores how firms respond in designing two-part tariffs to consumers' biased beliefs about their preferences. Biased consumers could be either overpessimistic when they underestimate their true demand or overoptimistic when they overestimate. Assuming that unbiased consumers consist of two types with high and low valuations, I show that the effect of the presence of biased consumers on unbiased consumers depends on market structure. The monopolist wants to educate overpessimistic consumers while may not want to educate overoptimistic consumers. Alternatively, in competition, firms do not have the incentive to educate any biased consumers. A debiasing policy for either overpessimistic or overoptimistic consumers unambiguously improves social welfare in competition but could harm social welfare in monopoly.

Keywords: biased belief; overoptimistic consumers; overpessimistic consumers; two-part tariff (search for similar items in EconPapers)
JEL-codes: D42 D43 D91 L12 L13 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2024-04-11
New Economics Papers: this item is included in nep-com, nep-cta, nep-ind, nep-mic and nep-reg
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