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

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Author Info

  • Kosfeld, Michael

    ()
    (Goethe University Frankfurt)

  • Schüwer, Ulrich

    ()
    (Goethe University Frankfurt)

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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6061.

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Length: 45 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:iza:izadps:dp6061

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

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References

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  1. 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.
  2. repec:bla:restud:v:73:y:2006:i:4:p:1113-1131 is not listed on IDEAS
  3. Spiegler, Ran, 2011. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780195398717, September.
  4. Ran Spiegler, 2005. "Competition over Agents with Boundedly Rational Expectations," Levine's Bibliography 122247000000000535, UCLA Department of Economics.
  5. 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.
  6. Mark Armstrong, 2008. "Interactions between Competition and Consumer Policy," CPI Journal, Competition Policy International, vol. 4.
  7. Armstrong, Mark & Vickers, John & Zhou, Jidong, 2008. "Consumer protection and the incentive to become informed," MPRA Paper 9898, University Library of Munich, Germany.
  8. Edward L. Glaeser & Gergely Ujhelyi, 2006. "Regulating Misinformation," NBER Working Papers 12784, National Bureau of Economic Research, Inc.
  9. Ran Spiegler, 2006. "The Market for Quacks," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1113-1131.
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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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