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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6061.
Length: 45 pages
Date of creation: Oct 2011
Date of revision:
Contact details of provider:
Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
Other versions of this item:
- Kosfeld, Michael & Schüwer, Ulrich, 2011. "Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education," CEPR Discussion Papers 8636, C.E.P.R. Discussion Papers.
- 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)
- NEP-COM-2011-11-14 (Industrial Competition)
- NEP-MKT-2011-11-14 (Marketing)
- NEP-REG-2011-11-14 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Xavier Gabaix & David Laibson, 2006.
"Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets,"
The Quarterly Journal of Economics,
MIT Press, vol. 121(2), pages 505-540, May.
- Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
- Laibson, David I. & Gabaix, Xavier, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
- repec:bla:restud:v:73:y:2006:i:4:p:1113-1131 is not listed on IDEAS
- Spiegler, Ran, 2011.
"Bounded Rationality and Industrial Organization,"
Oxford University Press, number 9780195398717, September.
- Ran Spiegler, 2005.
"Competition over Agents with Boundedly Rational Expectations,"
122247000000000535, UCLA Department of Economics.
- Spiegler, Ran, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 1(2), pages 207-231, June.
- 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.
- Mark Armstrong, 2008.
"Interactions between Competition and Consumer Policy,"
Competition Policy International, vol. 4.
- Armstrong, Mark, 2008. "Interactions between competition and consumer policy," MPRA Paper 7258, University Library of Munich, Germany.
- Armstrong, Mark & Vickers, John & Zhou, Jidong, 2008.
"Consumer protection and the incentive to become informed,"
9898, University Library of Munich, Germany.
- Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Consumer Protection and the Incentive to Become Informed," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 399-410, 04-05.
- Edward L. Glaeser & Gergely Ujhelyi, 2006.
NBER Working Papers
12784, National Bureau of Economic Research, Inc.
- Ran Spiegler, 2006.
"The Market for Quacks,"
Review of Economic Studies,
Oxford University Press, vol. 73(4), pages 1113-1131.
- Nick Vikander, 2014. "Sellouts, Beliefs, and Bandwagon Behavior," Discussion Papers 14-15, University of Copenhagen. Department of Economics.
- Armstrong, Mark & Vickers, John, 2012.
"Consumer protection and contingent charges,"
37239, University Library of Munich, Germany.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak).
If references are entirely missing, you can add them using this form.