 Welfare improving discrimination based on cognitive limitationsResearch in Economics, 2016, vol. 70, issue 4, 608-622 Abstract: This paper is concerned with the situation in which a profit-maximizing monopolist faces consumers that are heterogeneous in two dimensions: their taste for quality and their level of cognitive limitations. The behavioral phenomenon considered here is the attraction effect when choices are made across categories. Using the standard second-degree price discrimination model, the optimal menu of contracts is characterized. Discriminating consumers based on their taste and cognitive limitations allows the monopolist to partially relax the incentive compatibility constraints. The decrease in distortion caused by the reduction of information rents moves the economy towards the efficient outcome. The optimal contract does not only increase the monopolist׳s profit but also improves the aggregate welfare of the economy. Furthermore, it provides a possible explanation for the apparent puzzle why one may observe that the same quality products are priced differently under different labels. Keywords: Bounded rationality; Attraction effect; Contract design; Welfare (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:70:y:2016:i:4:p:608-622 DOI: 10.1016/j.rie.2015.05.002 Access Statistics for this article Research in Economics is currently edited by Federico Etro More articles in Research in Economics from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.