Competition and Consumer Protection: A Behavioral Economics Account
SWEDISH COMPETITION AUTHORITY, THE PROS AND CONS OF CONSUMER PROTECTION, Forthcoming
27 Pages Posted: 21 Dec 2011
Date Written: December 19, 2011
Do the benefits of competition extend to a world with imperfectly rational consumers? I argue that sellers, operating in a competitive market, will design their products, contracts and pricing schemes in response to consumer misconception, resulting in both efficiency losses and harm to consumers. Under certain conditions, competition provides incentives for sellers to educate consumers and reduce misconception, but these mistake-correction forces are limited. The existence of biased demand, generated by imperfectly rational consumers, creates a market failure – a behavioral market failure. Mandated disclosure, deliberately designed for imperfectly rational consumers, or for sophisticated intermediaries that advise imperfectly rational consumers, can help.
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