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Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education

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  • Kosfeld, Michael
  • Schüwer, Ulrich

Abstract

Previous research shows that firms shroud high add-on prices in competitive markets with naive consumers leading to inefficiency. We analyze the effects of regulatory intervention via educating naive consumers on equilibrium prices and welfare. Our model allows firms to shroud, unshroud, or partially unshroud add-on prices. Results show that consumer education may increase welfare; however, it may also decrease welfare if education is insufficient to alter the equilibrium information and pricing strategy of firms. Educating consumers may do more harm than good and should thus only be considered if the regulator is sufficiently well informed about consumer and firm behavior.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8636.

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Date of creation: Nov 2011
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Handle: RePEc:cpr:ceprdp:8636

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Keywords: bounded rationality; competition; consumer protection; regulation; welfare;

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  1. repec:bla:restud:v:73:y:2006:i:4:p:1113-1131 is not listed on IDEAS
  2. Glaeser, Edward L. & Ujhelyi, Gergely, 2010. "Regulating misinformation," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 247-257, April.
  3. Armstrong, Mark, 2008. "Interactions between competition and consumer policy," MPRA Paper 7258, University Library of Munich, Germany.
  4. Armstrong, Mark & Vickers, John & Zhou, Jidong, 2008. "Consumer protection and the incentive to become informed," MPRA Paper 9898, University Library of Munich, Germany.
  5. Ran Spiegler, 2005. "Competition over Agents with Boundedly Rational Expectations," Levine's Bibliography 122247000000000535, UCLA Department of Economics.
  6. Rani Spiegler, 2005. "The Market for Quacks," Levine's Bibliography 784828000000000634, UCLA Department of Economics.
  7. Laibson, David I. & Gabaix, Xavier, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
  8. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261, October.
  9. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Souphala Chomsisengphet & Douglas D. Evanoff, 2009. "Do financial counseling mandates improve mortgage choice and performance? Evidence from a legislative experiment," Working Paper Series WP-09-07, Federal Reserve Bank of Chicago.
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Cited by:
  1. Nick Vikander, 2014. "Sellouts, Beliefs, and Bandwagon Behavior," Discussion Papers 14-15, University of Copenhagen. Department of Economics.
  2. Armstrong, Mark & Vickers, John, 2012. "Consumer protection and contingent charges," MPRA Paper 37239, University Library of Munich, Germany.
  3. Wenzel, Tobias, 2014. "Consumer myopia, competition and the incentives to unshroud add-on information," Journal of Economic Behavior & Organization, Elsevier, vol. 98(C), pages 89-96.

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