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Shrouded Attributes and the Curse of Educatoin

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  • David Laibson
  • Xavier Gabaix

Abstract

Some consumers fail to observe shrouded product attributes when they buy a new product. For example, an account holder may not know their bank's fee schedule. Firms will choose high shrouded fees and compete to attract consumers with loss-leader base goods: e.g., banks will offer free gifts for opening an account and then snare naive consumers with high fees for bouncing a check. Sophisticated consumers take the free gifts and avoid the shrouded fees. Under weak conditions, firms will not be able to profitably attract consumers by advertising low add-on prices, since sophisticated consumers would rather pool with naive consumers at shrouded firms then switch to transparent firms with low add-on fees and no free gifts. Bertrand competition breaks down and monopoly pricing of the add-on persists even in markets with high levels of competition and costless advertising

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 673.

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Date of creation: 2004
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Handle: RePEc:red:sed004:673

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Related research

Keywords: bounded rationality; behavioral economics; behavioral industrial organization; shrouded attributes; loss leader; myopia; add-on; profit center; complexity; confusion; discrete choice.;

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