Consumers are often unaware of, or misperceive some, product or contract characteristics. Misunderstandings of contract terms allow firms to charge unexpectedly high prices at an ex-post stage, after consumers have already entered a relationship with the firm. While some researchers have pointed out that competition for such naive consumers will return much of the ex-post profits to consumers and, therefore, limit the harm and inefficiency, others argue that in certain industries competing firms' ability to cut ex-ante prices can be limited – e.g., by the threat of “arbitrageurs” who are not interested in the product itself, but who are willing to take it for easy money. This, as well as other reasons, can lead to adverse-selection effects in which a firm that lowers its price disproportionately principally attracts unprofitable customers. Finally, even when consumers correctly perceive the market environment that they are operating in, evidence suggests that consumers often systematically mispredict their own future preferences and behavior, with firms systematically exploiting these biases. Our research will focus on what contract terms or features enable firms to exploit consumer mistakes, and how (existing) regulations impact (or fail to impact) the firms' ability to do so.

Our research is both, theoretical and experimental. In experimental work we investigate, for example, the role of price framing and price partitioning. In previous work carried out for the UK's Office of Fair Trading, we have shown that drip pricing – where parts of the price such as shipping or credit card fees are only "dripped in" when the consumer has started the purchasing process – are hugely detrimental to consumer welfare. In this task we will follow up and investigate the finer details of mechanisms such as the number of drips or partitions. In related work, we will also investigate the role of price framing for add-on insurance products and study other features of these markets that are notorious for exploiting consumers' loss aversion. This strand of work simultaneously explores causes for suboptimal consumer behavior and possible remedies and is in some instances carried out in collaboration with consumer protection agencies. Moreover, we also study biases in household finance decisions and investigate possible tools to foster stock market participation. This strand of research utilizes experiments in large household panels.

Finally, a central aim of this task is to draw practical lessons from these insights of behavioural economics and psychology and integrate them into legal research in the area of contract law. Specifically, we aim at developing a tool box for "intelligent" regulation, in the sense of instruments that are well-attuned to the processes of human decision-making as they unfold in the real world.