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We study the market consequences of advances in consumption tracking technologies-such as mobile banking apps that help consumers monitor their spending and avoid overdrawn accounts-using a two -period consumption model. In the model, consumers pay a penalty fee if they consume in both periods. In the second period, consumers may be forgetful of their first -period consumption, although the use of consumption tracking can remind them. According to our analysis, the availability of consumption tracking often helps consumers at the expense of the firm; such benefits may be direct, , where consumers make use of the technology to avoid penalty fees, or indirect, , where the mere availability of consumption tracking forces the firm to lower its penalty fee. If consumers are partially sophisticated regarding their forgetfulness, however, the availability of consumption tracking may instill a false sense of security in that consumers expect to use consumption tracking to avoid penalty fees but ultimately, decide not to bother, making them especially susceptible to penalty fees. In some cases, the availability of consumption tracking may actually compel a firm to impose a penalty fee that would not otherwise be viable, leading to higher profits and lower consumer surplus. As we show, this scenario is attained within an intermediate range of forgetfulness and at a level of (partial) sophistication for which consumers overestimate their demand for the technology.

This paper uses a stylized duopoly model to study the competitive effects of Behavior-Based Servicing (BBS), a common practice that rewards loyal customers with service priority. BBS entails dual externalities: improved service quality to high-priority customers (positive externality) leads to reduced service quality to low-priority customers (negative externality), and vice versa. When both firms adopt BBS, their customers may pay a status premium above their natural product valuation in anticipation of future value from the positive externality. Both firms gain profits in such a status-seeking equilibrium. However, consumers can become apathetic to BBS in a market with a strong negative externality for low-priority customers; in such an equilibrium, loyal customers do not benefit from their high-priority status. When competing firms pursue opposite BBS strategies, the firm which does not use BBS can earn a higher profit than its competitor because new customers will experience the negative externality only from the firm that uses BBS. These results underscore the importance of examining both sides of externalities engendered by BBS.