Volume 21, Issue 3

This paper extends the standard model of monopolistic screening to allow for some consumers who engage in narrow framing, a prominent behavioral bias of mental accounting. Narrow framing generates a bias toward high quality-price ratios, which induces even high-type consumers to choose a menu that targets low-type consumers. To strategically account for narrow framing, when the monopolist induces the high-type consumers to stay with the more expensive menu, there arises a downward quality distortion even at the top and a smaller downward distortion at the bottom. Then, we apply this model to optimal loan contracts to screen heterogeneous borrowers with different default risks. We find that the lender optimally reduces the collateral requirement for low-risk borrowers when some high-risk borrowers are subject to narrow framing. This result empirically implies that narrow framing may lead to smaller credit rationing and lower monitoring intensity in the lending markets.

Buyers are often active on multiple digital platforms, while gatekeeper platforms can force sellers contractually to use one platform exclusively. This paper considers the welfare effects of such exclusivity clauses for buyers, sellers and platforms in a platform duopoly with a seller membership fee. A setting with partially multihoming buyers and sellers is compared to one with partially multihoming buyers and singlehoming sellers. It is shown that exclusivity clauses predominately harm total welfare. Buyers suffer if sellers are exclusive on one platform, while platforms and sellers benefit from exclusivity clauses under certain conditions. In an environment with exclusivity clauses, when strong cross-group benefits and weak platform differentiation result in fierce price competition, exclusivity clauses can be welfare-enhancing.