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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. Armstrong, Mark & Vickers, John, 2012. "Consumer protection and contingent charges," MPRA Paper 37239, University Library of Munich, Germany.
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  5. Henderson, Brian J. & Pearson, Neil D., 2011. "The dark side of financial innovation: A case study of the pricing of a retail financial product," Journal of Financial Economics, Elsevier, vol. 100(2), pages 227-247, May.
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  7. de Meza, David & Reyniers, Diane, 2012. "Every shroud has a silver lining: The visible benefits of hidden surcharges," Economics Letters, Elsevier, vol. 116(2), pages 151-153.
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  9. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
  10. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261, September.
  11. Justine S. Hastings & Brigitte C. Madrian & William L. Skimmyhorn, 2012. "Financial Literacy, Financial Education and Economic Outcomes," NBER Working Papers 18412, National Bureau of Economic Research, Inc.
  12. Utpal Bhattacharya & Andreas Hackethal & Simon Kaesler & Benjamin Loos & Steffen Meyer, 2012. "Is Unbiased Financial Advice to Retail Investors Sufficient? Answers from a Large Field Study," Review of Financial Studies, Society for Financial Studies, vol. 25(4), pages 975-1032.
  13. Carlin, Bruce I., 2009. "Strategic price complexity in retail financial markets," Journal of Financial Economics, Elsevier, vol. 91(3), pages 278-287, March.
  14. Miao, Chun-Hui, 2010. "Consumer myopia, standardization and aftermarket monopolization," European Economic Review, Elsevier, vol. 54(7), pages 931-946, October.
  15. Bruce Ian Carlin & Gustavo Manso, 2011. "Obfuscation, Learning, and the Evolution of Investor Sophistication," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 754-785.
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