1. Behavioral consumer theory
How should firms profit-max with behavioral consumers?
Procrastinating consumers
Blockbuster…huge profit from late fees, forecasting error + loss-aversion?
Credit card “teaser rates” (Ausubel AER 91?)
Only 70% pay off balance, average household balance $5,000
Netflix– pay a monthly fee for movies…but don’t get around to watching them!  Per movie fee may be large
Health clubs (Della Vigna & Malmendier, 04)
Pay $17/visit through annual fees vs $10/visit

2. Behavioral consumer theory
How should firms behave with lifelike consumers? II
Price discrimination through impatience
Discriminate by demand based on impatience
Movie openings (Star Wars)
Similar to conventional price discrimination but comes from β-δ?
Rebates
Consumers plan to cash in rebates, only 15% do so
Pricing illusions
“10 CD’s for $.01”…relies on laziness in sending back CD’s+shipping fees
When does competition eliminate behavioral demand effects?
A: Depends on consumer forecasting of future mistakes
Is there more profit in exploiting mistakes or correcting mistakes?
Political regulation vs firm competition to help consumers
E.g., “cooling off” laws, price gouging, class action (Blockbuster)

3. Loss-aversion & pricing (Heidhues & Koszegi, 04)
Personal equilibrium (Rabin & Koszegi 04):
Consumers create reference point (matches expected purchase)
Loss-averse (λ) toward loss of money or goods (value v)
Timing
Firms …….consumer………price p, cost c….shock………………………..
pick F(p)…forms beliefs……..realized…………………….consumer buys
Shock h(w) to consumer value unique-fies demand (Prop 2)
Price stickiness (Prop 3)
For substantial loss-aversion, firms choose discrete prices
Prices don’t vary smoothly with cost c (surprising)
“menu costs” empirics, Kayshap et al QJE 02?
Intuition: At a price p, consumers dislike foregoing a lower price; incentivizes firms to lump prices together
Cf. “kinked” demand curve (1930’s econ) to explain sticky prices…but in this model it is derived endogeneously
Countercyclical markups (shrink in booms, grow in busts)
Explains puzzle of fixed consumer prices and wages shortages in recession, excess supply in booms