A group of n “quacks” plays a price-competition game, facing a continuum of “patients” who recover with probability α, whether they acquire a quack's “treatment”. If patients chose rationally, the market would be inactive. I assume, however, that patients choose according to a boundedly rational procedure, which reflects “anecdotal” reasoning. This element of bounded rationality has significant implications. The market for quacks is active, and patients suffer a welfare loss which behaves non-monotonically w.r.t. n and α. In an extended model that endogenizes the quacks' choice of “treatments”, the quacks minimize the force of price competition by offering maximally differentiated treatments. The patients' welfare loss is robust to market interventions, which would crowd out low-quality firms in standard models. Thus, as long as the patients' quality of reasoning is not lifted above the anecdotal level, ordinary competition policies may be ineffective.

In standard contract-theoretic models, the underlying assumption is that agent types differ in their preference or cost parameters, and the principal's objective is to design contracts in order to screen this type. We study a contract-theoretic model in which the heterogeneity among agent types is of a “cognitive” nature. In our model, the agent has dynamically inconsistent preferences. Agent types differ only in their degree of “sophistication”, that is, their ability to forecast the change in their future tastes. We fully characterize the menu of contracts which the principal offers in order to screen the agent's sophistication. The menu does not exclude any type: it provides a perfect commitment device for relatively sophisticated types, and “exploitative” contracts which involve speculation with relatively naive types. More naive types are more heavily exploited and generate a greater profit for the principal. Our results allow us to interpret real-life contractual arrangements in a variety of industries.