DP11284 Excessive Competition for Headline Prices

• Roman Inderst Obradovits Martin
18 May 2016

When firms can hide charges and consumers are prone to salient or relative thinking, this may have severe welfare consequences. The ensuring greater competition on headline prices, far from protecting consumers, may distort their choice and induce firms to offer inefficiently low product quality. As more intense competition leads to a larger pass-through of shrouded charges into lower headline prices, which aggravates these problems, competition policy alone cannot correct market outcomes. When competition is however complemented by effective consumer protection, high-quality firms have sufficient incentives to unshroud hidden charges, disciplining firms’ choice of quality and restoring efficiency.