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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 in:Economics letters 2019-01, Vol.174, p.89-92
Main Authors: Murooka, Takeshi, Schwarz, Marco A.
Format: Article
Language:English
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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