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 still 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 sufficiently competitive markets, and price-posting regulation is counterproductive. 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 debit-card overdraft-protection could substantially benefit consumers.

We estimate a model of consumer plan choice, usage, and learning in cellular-phone services on a detailed panel data set of individual bills. We infer consumers' predictions of their future cellular usage from plan choices, and compare these predictions to actual usage. We find that on average consumers underestimate their average tastes for calling (mean bias), underestimate their own uncertainty about their average tastes (overconfidence), and underestimate the monthly variation (volatility bias) in their tastes for usage. Counterfactual simulations show these biases cost consumers at least $58 per year. Our paper also advances structural modeling of demand in situations where multipart tariffs induce marginal price uncertainty at the time consumers make consumption choices. Our approach is based on novel evidence that consumers are inattentive to past usage in such settings and allows us to model consumer response to bill-shock alerts. Counterfactual simulations predict that, accounting for firms’ endogenous pricing response, the FCC's recent bill-shock agreement requiring users be notified when exceeding usage allowances will lower average consumer welfare by about $10 per year. Absent consumer bias, the agreement would have little to no effect.

This paper studies the role of information asymmetries in second price, common value auctions. Motivated by information structures that arise commonly in applications such as online advertising, we seek to understand what types of information asymmetries lead to substantial reductions in revenue for the auctioneer. One application of our results concerns online advertising auctions in the presence of ``cookies,'' which allow individual advertisers to recognize advertising opportunities for users who, for example, are customers of their websites. Cookies create substantial information asymmetries both ex ante and at the interim stage, when advertisers form their beliefs. The paper proceeds by first introducing a new refinement, which we call ``tremble robust equilibrium'' (TRE), which overcomes the problem of multiplicity of equilibria in many domains of interest. Second, we consider a special information structure, where only one bidder has access to superior information, and show that the seller's revenue in the unique TRE is equal to the expected value of the object conditional on the lowest possible signal, no matter how unlikely it is that this signal is realized. Thus, if cookies identify especially good users, revenue may not be affected much, but if cookies can (even occasionally) be used to identify very poor users, the revenue consequences are severe. In the third part of the paper, we study the case where multiple bidders may be informed, providing additional characterizations of the impact of information structure on revenue. Finally, we consider richer market designs that ensure greater revenue for the auctioneer, for example by auctioning the right to participate in the mechanism.

Consumers may overestimate the precision of their demand forecasts. This overconfidence creates an incentive for both monopolists and competitive firms to offer tariffs with included quantities at zero marginal cost, followed by steep marginal charges. This matches observed cell-phone service pricing plans in the US and elsewhere. An alternative explanation with common priors can be ruled out in favor of overconfidence based on observed customer usage patterns for a major US wireless phone service provider. The model can be reinterpreted to explain the use of flat rates and late fees in rental markets, and teaser rates on loans. Nevertheless, firms may benefit from consumers losing their overconfidence.

(The 2008 working paper version is available from SSRN here as well as from my website here. Download 2008 web appendix here.)

A sender who has disclosable information with probability less than one may partially conceal bad news by choosing to withhold information and pooling with uninformed types. The success of this strategy depends on receivers' beliefs about the probability that the sender has disclosable news. In a dynamic context, informed senders try to cultivate a reputation for reticence either by concealing good news along with the bad, or by concealing some good news and disclosing some bad news. A reputation for reticence is valuable because it makes receivers less skeptical of past or future non-disclosures. The model provides insight into the choice by firms such as Google not to disclose quarterly earnings guidance to analysts, as well as Tony Blair's reticence over his son's vaccine record during the MMR scare in the UK.

Recent research highlights the importance of biased expectations and inattention for nonlinear pricing in dynamic environments. Findings are: (1) Three-part tariffs, such as cellular service contracts, exploit consumer overconfidence. (2) Surprise penalty fees may be used to further exploit biased beliefs or alternatively to price discriminate more efficiently whenever consumers are inattentive. (3) Implementing the recent bill-shock agreement between cellular carriers and the FCC is predicted to harm rather than help consumers when endogenous price changes are taken into account.

We use university parking permits to study how firms and employees split the value of employee benefit tax subsidies. Starting in 1998, the IRS allowed employees to pay for parking passes with pre-tax income. This subsidized the parking pass purchases of faculty and staff, but did not affect students. We show that the typical university raised its parking rates by 8-10% extra when it implemented a pre-tax payment system, but that this increase was the same for those affected by the tax change and those that were not affected. We conclude that university employees captured much of the new tax benefit, that faculty and staff that purchase permits benefited relative to those that do not purchase permits, and that students that purchase permits were made worse off relative to those that do not buy permits.