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There was also a growing disparity between the penalty rate and the regular purchase APR, something we
referred to as “penalty shock” (see Figure 3). In addition, it turns out that the penalty rate is an underlying
price dimension that remains hidden, with the Survey of Consumer Finances suggesting most people (54%)
were unaware they were being charged this dramatically higher rate. 10
Figure 3: Penalty Shock (Penalty APR minus Purchase APR in Solicatations)
The Signal Comes to Dominate and Drive Product Design
While there are certainly signal distortions in the purchase of a new car, basic car design still is centered on
useful attributes such as space, power, fuel efficiency, reliability, etc. The majority of innovations likewise
focus on improving these product features. For credit cards, however, much of what is called product
innovation comes in the form of new pricing structures that create perceived value without creating
underlying benefits (or conversely that maintain perceived cost while actually increasing the underlying
cost). An example of a product designed around creating perceived value through a distorted signal is a
“0% for life” offer on certain credit card account balances. The offer is only profitable due to repricing
mechanisms such as penalty APRs and payment allocation rules that create higher prices for the majority of
consumers than what the offer would seem to imply.
The pervasive use of teasers also drives the design of credit card products, other dimensions of pricing, and
the technology used to support those products. Other examples of products designed around the price
structure include “fee harvester” cards that are targeted to the subprime market and often feature a
10 Id. at 6.
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