Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education
AbstractPrevious 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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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8636.
Date of creation: Nov 2011
Date of revision:
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Other versions of this item:
- Kosfeld, Michael & Schüwer, Ulrich, 2011. "Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education," IZA Discussion Papers 6061, Institute for the Study of Labor (IZA).
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-14 (All new papers)
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