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

Author

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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.

Suggested Citation

  • Kosfeld, Michael & Schüwer, Ulrich, 2014. "Add-on pricing in retail financial markets and the fallacies of consumer education," SAFE Working Paper Series 47, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  • Handle: RePEc:zbw:safewp:47
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    References listed on IDEAS

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    Cited by:

    1. Flores-Fillol, Ricardo & Iozzi, Alberto & Valletti, Tommaso, 2014. "Platform pricing and consumer foresight: The case of airports," Working Papers 2072/242278, Universitat Rovira i Virgili, Department of Economics.
    2. Takeshi Murooka & Marco A. Schwarz, 2016. "The Timing of Choice-Enhancing Policies," CESifo Working Paper Series 5983, CESifo Group Munich.
    3. Schwardmann, Peter & Ispano, Alessandro, 2016. "Competitive pricing and quality disclosure to cursed consumers," Annual Conference 2016 (Augsburg): Demographic Change 145573, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

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

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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