Cursed Consumers and the Effectiveness of Consumer Protection Policies

Alessandro Ispano and Peter Schwardmann
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Peter Schwardmann: LMU - Ludwig Maximilian University [Munich] = Ludwig Maximilians Universität München

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Abstract: We model firms' quality disclosure and pricing in the presence of cursed consumers, who fail to be sufficiently skeptical about undisclosed quality. We show that cursed consumers are exploited in duopoly if firms are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common consumer protection policies that work under monopoly, that is, mandatory disclosure, third party disclosure and consumer education, may all increase exploitation and decrease welfare. Even where these policies improve welfare, they often lead to a reduction in consumer surplus. Our conclusions hold in extensions with endogenous quality and horizontal differentiation.

Keywords: naive; cursed; disclosure; consumer protection; labeling (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-reg
Note: View the original document on HAL open archive server: https://hal.science/hal-04182135
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Published in Journal of Industrial Economics, 2023, 71 (2), pp.407-440. ⟨10.1111/joie.12332⟩

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Journal Article: Cursed Consumers and the Effectiveness of Consumer Protection Policies (2023)
Working Paper: Cursed Consumers and the Effectiveness of Consumer Protection Policies (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04182135

DOI: 10.1111/joie.12332

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