Market Effects of Inattention: Theory and Evidence from Left-Digit Bias

Abstract

A large body of research shows that even when information is accessible, consumers often fail to attend to it. To what extent and under what conditions can firms profit from such consumer inattention? The authors study this question theoretically and empirically in the used car market, focusing on the widely documented left-digit bias. Theoretically, firms can profit from targeting the most inattentive consumers even when there is an active decentralized market for used goods trading. Leveraging a detailed dataset of millions of automobile transactions from a seven-year period, the authors find that consumers exhibit inattention in the form of left-digit bias to the odometer, and such inattention is estimated to be significantly more for consumers who buy from firms. Compared with private sellers, car dealerships transact with ex post significantly more left-digit-biased consumers. Dealerships sell more vehicles with odometer readings below round numbers, sell them faster, and extract higher margins from these vehicles. The results imply that intermediaries can “skim” consumers with specific behavioral biases and extract meaningful surplus from selling to them.