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Shrouded Attributes and the Curse of Educatoin

Listed author(s):
  • David Laibson
  • Xavier Gabaix

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

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Date of creation: 2004
Handle: RePEc:red:sed004:673
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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