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Add-on pricing in retail financial markets and the fallacies of consumer education

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  • Kosfeld, Michael
  • Schüwer, Ulrich

Abstract

This paper explores consequences of consumer education on prices and welfare in retail financial markets when some consumers are naive about shrouded add-on prices and firms try to exploit it. Allowing for different information and pricing strategies we show that education is unlikely to push firms to disclose prices towards all consumers, which would be socially effifficient. Instead, price discrimination emerges as a new equilibrium. Further, due to a feedback on prices, education that is good for consumers who become sophisticated may be bad for consumers who stay naive and even for the group of all consumers as a whole. --

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Bibliographic Info

Paper provided by Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt in its series SAFE Working Paper Series with number 47.

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Date of creation: 2014
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Handle: RePEc:zbw:safewp:47

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Keywords: consumer education; financial literacy; bounded rationality; competition; regulation;

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  1. Justine S. Hastings & Brigitte C. Madrian & William L. Skimmyhorn, 2013. "Financial Literacy, Financial Education, and Economic Outcomes," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 347-373, 05.
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