Events

Consumers often forget their past consumptions and incur overage charges. Technologies such as mobile applications have emerged to help consumers track their spending and eliminate overage charges. This paper is intended to examine the relation between consumer forgetfulness and overage charges as well as the implications of a lower consumption tracking cost due to technology improvements. To accomplish this, I develop a model of consumers who are forgetful about past usage and may be naïve about their forgetfulness.  In the model, a firm offers a service contract to consumers who will incur a penalty fee if they overuse the service prior to the end of the contract’s billing cycle.  Consumers who are forgetful, and naïve in the sense that they underestimate their forgetfulness ex-ante, will be more likely to incur such fees.  The model allows consumers the option of using a consumption tracking technology during the billing cycle at a cost; consumers who use the technology will be informed of their usage, so they can avoid penalty fees. In equilibrium, I show that decreases in the cost of tracking will improve consumer welfare, even if consumers never use the technology.  The intuition behind this result is that the firm will lower the penalty fee to disincentivize consumers from tracking their consumption.  Furthermore, I show that when consumers are heterogeneous in their levels of forgetfulness, decreases in the cost of tracking will reduce welfare for some consumers, while benefiting others. This is because the firm will design its contract to exploit some consumers and a lower tracking cost serves as a tool for the firm to discriminate between consumers. These results confirm the importance for the firms and regulators to consider consumers’ lack of sophistication towards their forgetfulness.