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Title:Add-on pricing, naive consumers, and the hidden welfare costs of education PDF Logo
Authors:Kosfeld, Michael
Schüwer, Ulrich
Issue Date:2011
Series/Report no.:Discussion Paper series, Forschungsinstitut zur Zukunft der Arbeit 6061
Abstract: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.
Subjects:bounded rationality
competition
regulation
welfare
consumer protection
JEL:D40
D80
L50
Persistent Identifier of the first edition:urn:nbn:de:101:1-201111072755
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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