Consumer exploitation and notice periods

Firms often set long notice periods when consumers cancel a contract, and sometimes do so even when the costs of changing or canceling the contract are small. We investigate a model in which a firm offers a contract to consumers who may procrastinate canceling it due to naive present-bias. We show t...

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Bibliographic Details
Published inEconomics letters Vol. 174; pp. 89 - 92
Main Authors Murooka, Takeshi, Schwarz, Marco A.
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.01.2019
Elsevier Science Ltd
Subjects
Bias
Cancellations
Consumer naivete
Consumers
Contracts
Exploitation
Notice periods
Present bias
Procrastination
Time inconsistency
Procrastination
D40
D21
Present bias
Time inconsistency
Consumer naivete
D04
L51
D18
D90
Notice periods
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Summary:Firms often set long notice periods when consumers cancel a contract, and sometimes do so even when the costs of changing or canceling the contract are small. We investigate a model in which a firm offers a contract to consumers who may procrastinate canceling it due to naive present-bias. We show that the firm may set a long notice period to exploit naive consumers. •We analyze the welfare effects of notice periods for canceling contracts.•With rational consumers and no adjustment cost, firms do not set any notice period.•Firms may set long notice periods to exploit naive consumers.•Policies prohibiting long notice periods can increase consumer welfare.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2018.10.036