Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/97233
Authors: 
Sürücü, Oktay
Year of Publication: 
2013
Series/Report no.: 
Working Papers, Center for Mathematical Economics 495
Abstract: 
This paper is concerned with the situation in which a profit-maximizing monopolist faces consumers that are diverse not only in their preferences but also in their levels of bounded rationality. The behavioral phenomenon considered here is the attraction effects when choices are made across categories. Using the standard second-degree price discrimination model, the optimal menu of contracts that screens consumers' types is characterized. The benefit of discriminating consumers based on their preference and cognitive limitation is always higher than its cost. In other words, the monopolist can exploit consumers and increase his profit with this contract. The model provides a possible explanation for the apparent puzzle why one may observe that the same quality products are priced differently under different labels. Moreover, this contract is welfare improving.
Subjects: 
bounded rationality
attraction effect
contract design
welfare
JEL: 
D03
D42
D60
D82
D86
Document Type: 
Working Paper

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