Lydian Payments Journal - PYMNTS.com

payments, purchases, and cash advances. 13 In this example, the promotional rate balance disappears in six
months, rendering it useless at that point even if the offer gave the promotion for a full year. After month
six, the purchase balance rapidly declines leaving almost all of the customer’s balance at the cash advance
rate which is typically much higher.
The Evolution of “Fragmentation”
With fragmentation, a uniform price or quality is broken into smaller pieces for the purpose of creating
signals. Unlike the traditional literature on signaling where information is naturally fragmented and the
signal is used to improve information, 14 in a peacock market fragmentation is actually an information
reduction strategy. A firm manipulates a product design to shroud underlying pricing or quality while
presenting prominently the factors optimized to draw in consumers.
Credit card pricing has become dominated by prominent (but misleading) price signals combined with
shrouded revenue enhancement mechanisms to compensate for the cost of these signals. While a uniform
price — or at least not highly disparate price — over time is more informative and more consistent with
product cost, the price of credit cards over time is intentionally fragmented into two general components.
The first is a highly prominent price signal that consumers are known to disproportionately attend to,
while the second is a less obvious but larger component of price that is adjusted to make up for losses in
the signal price.
Perhaps the archetypical example of fragmentation for any industry could be the credit card teaser rate. In
a perfect market with rational consumers using a fixed, reasonable discount rate, there would be no reason
to price products at 0% for the first 6 months or year, and then a much higher interest rate thereafter. It
makes little sense based on the cost of lending or any other economic rationale. APRs on credit cards were
at one time uniform. The primary purpose of disaggregating the near term interest rate and charging a
separate price appears to be to create a powerful price signal. But this is not an information‐enhancing
signal as the traditional economic literature suggests. Instead, unnecessary complexity is introduced to
create a signal that is lower than the long‐term cost of credit. Due to cognitive constraints and limited
attention, the information level digested by the consumer is probably lower due to the creation of the
signal. This is what the signal is intended to do in peacock markets. It creates a compelling impression of
low prices despite the fact that the total price paid by the typical consumer is much higher. In some cases
13 In this scenario, the consumer starts with a $1,000 promotional balance and makes purchases and cash advances of
$100 a month each, while making payments in an amount equal to this monthly activity ($200 a month).
14 See, e.g., Spence, “Signaling in Retrospect.”
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