We analyze screening with frame-dependent valuations. A monopolist firm designs an extensive-form decision problem with frames at each stage. The optimal extensive form has a simple three-stage structure and uses changes in framing (high-low-high) to induce dynamic inconsistency and thereby reduce information rents. To achieve this, the principal offers unchosen decoy contracts. Sophisticated consumers correctly anticipate that if they deviated, they would choose a decoy, which they want to avoid in the low frame. This allows the principal to eliminate some incentive constraints. With naive consumers, the principal can perfectly screen by cognitive type and extract full surplus from naifs.
Hidden Costs: Anticompetitive Eﬀects of Transparency
We identify a market characteristic central to the impact of the exploitation of consumer naïvete about hidden costs on profits, incentives to increase price transparency and the impact of transparency on consumer surplus: the difference between cross-price elasticities of demand of naïve and sophisticated consumers. Exploiting consumer naïvete increases profits and persist in the long run only if naïfs are more price sensitive than sophisticates. Targeting of transparency matters. Increased transparency is most valuable to consumers when firms have the least incentives to engage in it, can increase aggregate welfare, but typically redistributes surplus from consumers to firms.