Boundedly Rational Consumers and Complex Pricing Schemes

Shestakova, Natalia

The dissertation is dedicated to two interconnected questions. First, I try to understand how consumers choose from a set of complex pricing schemes. I design two lab experiments that generate rich datasets allowing to address the question of interest. The most interesting result comes from the second experiment, where in the set of pricing schemes offered to subjects, one pricing scheme has a convex cost function at the possible demand range, while all other pricing schemes have linear cost functions at this range. I document a bias towards the pricing scheme associated with a convex cost function. The second question is to understand how the observed consumer behavior affects pricing decisions of profit-maximizing firms. I address this question by constructing a model where a monopolist can price discriminate against consumers with different willingness to pay and the same limited ability to compare market alternatives. In this model, it might be profitable for the monopolist to include dominated offers (i.e. such offers that are never chosen by rational consumers who can compare all available offers) in the menu of pricing schemes. The main result is the necessary condition for this pricing strategy to be profitable: consumers with a higher willingness to pay should be more likely to have...

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