Buy Baits and Consumer Sophistication: Field Evidence from Instant Rebates

Are consumers in the marketplace aware of their cognitive limitations? Which limitations can be profitably exploited by firms? I answer these questions in the context of a ubiquitous form of price discrimination: "instant rebates" that require active redemption at the point of sale. I show theoretically how to recover consumers’ subjective beliefs about their cognitive limitations---that prevent them from redeeming 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 fully sophisticated about the probability of forgetting to redeem instant rebates, they vastly underestimate the \textit{hassle} of redeeming it by 20 EUR per consumer. Exploiting this misperception more than doubles the profitability of rebates.