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Discussion Paper Details

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Title: Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education

Author(s): Michael Kosfeld and Ulrich Schüwer

Publication Date: November 2011

Keyword(s): bounded rationality, competition, consumer protection, regulation and welfare

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Kosfeld, M and Schüwer, U. 2011. 'Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8636