Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets
37 Pages Posted: 24 May 2005
There are 2 versions of this paper
Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets
Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets
Date Written: April 11, 2005
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.
Keywords: behavioral economics, bounded rationality, consumer protection, information
JEL Classification: D00, D60, D80, L00
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets
By Xavier Gabaix and David Laibson
-
Divide and Prosper: Consumers' Reaction to Partitioned Prices
By Vicki Morwitz, Eric Greenleaf, ...
-
Obfuscation, Learning, and the Evolution of Investor Sophistication
By Bruce I. Carlin and Gustavo Manso
-
Obfuscation, Learning, and the Evolution of Investor Sophistication
By Bruce I. Carlin and Gustavo Manso
-
Consumer Myopia, Standardization and Aftermarket Monopolization
-
A Search Cost Model of Obfuscation
By Glenn Ellison and Alexander Wolitzky
-
The Economics of Slotting Contracts
By Joshua D. Wright and Benjamin Klein
-
By Simon P. Anderson and Andre De Palma