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Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets


Xavier Gabaix


New York University - Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

David Laibson


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

April 11, 2005

MIT Department of Economics Working Paper No. 05-18

Abstract:     
Bayesian consumers infer that hidden add-on prices (e.g. the cost of ink for a printer) are likely to be high prices. If consumers are Bayesian, firms will not shroud information in equilibrium. However, shrouding may occur in an economy with some myopic (or unaware) consumers. Such shrouding creates an inefficiency, which firms may have an incentive to eliminate by educating their competitors' customers. However, if add-ons have close substitutes, a "curse of debiasing" arises, and firms will not be able to profitably debias consumers by unshrouding add-ons. In equilibrium, two kinds of exploitation coexist. Optimizing firms exploit myopic consumers through marketing schemes that shroud high-priced add-ons. In turn, sophisticated consumers exploit these marketing schemes. It is not possible to profitably drive away the business of sophisticates. It is also not possible to profitably lure either myopes or sophisticates to non-exploitative firms. We show that informational shrouding flourishes even in highly competitive markets, even in markets with costless advertising, and even when the shrouding generates allocational inefficiencies.

Number of Pages in PDF File: 37

Keywords: behavioral economics, bounded rationality, consumer protection, information

JEL Classification: D00, D60, D80, L00

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Date posted: May 24, 2005  

Suggested Citation

Gabaix, Xavier and Laibson, David, Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets (April 11, 2005). MIT Department of Economics Working Paper No. 05-18. Available at SSRN: http://ssrn.com/abstract=728545 or http://dx.doi.org/10.2139/ssrn.728545

Contact Information

Xavier Gabaix (Contact Author)
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
HOME PAGE: http://pages.stern.nyu.edu/~xgabaix/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
David I. Laibson
Harvard University - Department of Economics ( email )
Littauer Center
Room M-14
Cambridge, MA 02138
United States
617-496-3402 (Phone)
617-495-8570 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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