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

  • Kosfeld, Michael
  • Schüwer, Ulrich

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8636.

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Date of creation: Nov 2011
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Handle: RePEc:cpr:ceprdp:8636
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  1. Edward L. Glaeser & Gergely Ujhelyi, 2006. "Regulating Misinformation," NBER Working Papers 12784, National Bureau of Economic Research, Inc.
  2. Armstrong, Mark, 2008. "Interactions between competition and consumer policy," MPRA Paper 7258, University Library of Munich, Germany.
  3. 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.
  4. Ran Spiegler, 2006. "The Market for Quacks," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1113-1131.
  5. 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.
  6. Spiegler, Ran, 2011. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780195398717.
  7. 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.
  8. Ran Spiegler, 2005. "Competition over Agents with Boundedly Rational Expectations," Levine's Bibliography 122247000000000535, UCLA Department of Economics.
  9. repec:bla:restud:v:73:y:2006:i:4:p:1113-1131 is not listed on IDEAS
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