Buy Baits and Consumer Sophistication : Theory and Field Evidence from Large-Scale Rebate Promotions

Are consumers in the marketplace aware of their behavioral biases? Which biases can be profitably exploited by firms? I answer these questions in the context of a widely regulated form of price discrimination: rebates that require active redemption. I show theoretically how to recover consumers’ subjective beliefs about their biases---that prevent them to redeem the rebate---from aggregate demand responses to rebates, redemption reminders, and a simple discount that does not require redemption. In a large-scale field experiment with a major online retailer, I find that consumers correctly increase demand when the firm offers a redemption reminder, but they fail to reduce demand when the firm increases the hassle required to redeem. Structural estimates reveal that, while consumers are almost fully sophisticated about the probability of forgetting to redeem the rebate, they vastly underestimate the hassle of redeeming it by 20 EUR per consumer. Exploiting this misperception increases the profitability of rebates by 150%