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

45 Pages Posted: 24 Nov 2011

See all articles by Michael Kosfeld

Michael Kosfeld

Goethe University Frankfurt; IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); University of Bonn - Center for Development Research (ZEF)

Ulrich Schüwer

University of Bonn - Institute for Financial Economics and Statistics; Research Center SAFE at Goethe University Frankfurt

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Date Written: November 2011

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.

Keywords: bounded rationality, competition, consumer protection, regulation, welfare

JEL Classification: D40, D80, L50

Suggested Citation

Kosfeld, Michael and Schüwer, Ulrich, Add-On Pricing, Naive Consumers, and the Hidden Welfare Costs of Education (November 2011). CEPR Discussion Paper No. DP8636. Available at SSRN: https://ssrn.com/abstract=1964126

Michael Kosfeld (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business Administration
Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60323
Germany

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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University of Bonn - Center for Development Research (ZEF) ( email )

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Bonn, NRW 53113
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Ulrich Schüwer

University of Bonn - Institute for Financial Economics and Statistics ( email )

Adenauerallee 24-42
Bonn, 53113
Germany

HOME PAGE: http://www.finance.uni-bonn.de/

Research Center SAFE at Goethe University Frankfurt ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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