Let\'s think about a slightly different model to explain the existence of overdr
ID: 1092149 • Letter: L
Question
Let's think about a slightly different model to explain the existence of overdraft fees. Suppose that all consumers are rational but that overdraft fees are contained in the small print of the contract and that it costs any consumer a small amount s > 0 to read the fine print. For simplicity let's assume that it is free to get a checking account (i.e., no base price). Suppose that all banks charge the maximum possible overdraft fee of p and consumers know this. Would any consumer read the fine print? Suppose that all consumers believe that banks charge overdraft fees of p RIGHT ARROW? Would any bank have any incentive to charge a lower fee (assume a cost of providing an overdraft is zero)? Do you think the banks would like to be able to advertise low overdraft fees to consumers? Give a few bullet points on your thoughts.Explanation / Answer
a.) No, the consumers would not read it.
As it is mentioned that all consumers know that all banks charge a maximum possible overdraft fees. Hence they would not spend s(small amount) to read, as they already have the information.
b.) No, there is no incentive.
Here we have taken the assumption that the customers know that all banks charge the maximum overdraft fee (p). Hence they will not read the fine print as explained above.
Now even if the bank charges a lower fee, the customers would be unaware about it. Hence it would not attract any new customers but would rather lead to loss of revenue.
c.) Yes, they would like to advertise the low overdraft fees.
Then they would be able to overcome the problem described in b. With the help of advertisement they can attract new customers due to their lower overdraft fees.
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