Bill Shock: Inattention and Price-Posting Regulation∗

For many goods and services, such as cellular-phone service and debit-card transactions, the marginal price of the next unit of service depends on past usage. As a result, consumers who are inattentive to their past usage may be aware of contract terms and yet remain uncertain about the marginal price of the next unit. I develop a model of inattentive consumption, derive equilibrium pricing when consumers are inattentive, and evaluate price-posting regulation requiring firms to publish marginal price at the time of each transaction. Inattention leads firms to charge surprise penalty fees for high usage when consumers are heterogeneous ex ante or have biased beliefs. When consumers are heterogeneous ex ante and have unbiased beliefs, inattention and penalty fees increase welfare in fairly-competitive markets, and price-posting regulation is socially harmful. Under these conditions, cellular-phone usage-alerts under consideration by the FCC could reduce welfare and harm consumers. If consumers are homogeneous ex ante but underestimate their demand, then price-posting regulation has an ambiguous impact on total welfare but may have large distributional benefits by increasing price competition and protecting consumers from exploitation. Hence the Federal Reserve’s new opt-in rule for debitcard overdraft protection could substantially benefit consumers. ∗A previous version of this paper circulated under the title ”Penalty Pricing: Optimal Price-Posting Regulation with Inattentive Consumers”. I thank Glenn Ellison, Bob Gibbons, Allesandro Bonatti, Tavneet Suri, Ginger Jin, and Bob Pindyck for helpful comments and suggestions. †MIT Sloan School of Management. [email protected], www.mit.edu/ ̃mgrubb.