Paul Heidhues

Recently, empirical evidence of consumer misunderstandings and exploitation thereof in markets such as those for consumer finance has lead to a variety of policy initiatives with the aim of protecting consumers. To inform such consumer protection initiatives, we need to understand the interplay between consumer biases and firm behavior, and ask how consumer protection regulations affect this interaction. To contribute to this open question, I will formalize consumer misunderstandings and - building on these formalizations - compare market settings in which consumers are exploited by profit-maximizing firms to those in which they are not. Having identified situations in which consumer exploitation is likely, I will compare different consumer protection regulations with respect to their ability to limit consumer exploitation as well as their unintended side effects. Similarly, I will compare settings in which consumer learning alleviates costly mistakes to those in which mis-directed learning leads them to even more biased decision making.