Kamenica, Mullainathan, and Thaler (2011) on Poorly Informed Consumers

Emir Kamenica, Sendhil Mullainathan, and Richard Thaler, “Helping Consumers Know Themselves.” American Economic Review 101(3): 417– 422, 2011 [pdf available here].

• Do cell phone users know about how many minutes they will talk under various pricing plans? Cell phone companies might be better informed than consumers – and possibly offer contracts that consumers will wrongly think are their best option. This is the issue explored by Kamenica, Mullainathan, and Thaler (2011). 

• If price menus are fixed, the more information about her preferences a customer has, the better off she is. But when firms can choose pricing terms, increased information for consumers does not necessarily make consumers better off. 

• As in the Choice Architecture article, RECAP (Record, Evaluate, and Compare Alternative Prices) is suggested. The idea is that firms must disclose pricing schemes, along with information to consumers about their own usage. Presumably this information could be used by third-party firms to compare plans, and recommend to consumers the plan that is best for them. 

• “Adverse targeting [p. 418]” is what the authors call the phenomenon where firms offer pricing plans to consumers that will tempt those consumers but end up being costly to them. 

• The requirement to reveal pricing is meant in part to avoid price shrouding, where important secondary prices – late fees, luggage fees, internet hook-up charges – are not made readily available to consumers. 

• For RECAP to help consumers, the consumers must want the information, and have easy means of responding to the information. For new sorts of services, estimating a consumer’s usage from past behavior is not possible. [I am heartened to learn from David Halpern's Inside the Nudge Unit that RECAP has been abandoned as a term because no one could remember what it stood for.]