Monopolistic Screening with Boundedly Rational Consumers*

Abstract

In this paper, I revisit the monopolistic screening problem with two types assuming that consumers are boundedly rational. Bounded rationality implies that the revelation principle does not apply and the choice of the selling mechanism entails a loss of generality. I show that if the monopolist restricts attention to the mechanisms that offer menus of two choices, the profits are lower than in the case of fully rational consumers by the term of order ln λ/λ, where λ is the degree of rationality of the consumers. The monopolist, however, can approximate the profits earned when consumers are fully rational by using a more elaborate message game.