Competitive pricing and quality disclosure to cursed consumers

Peter Schwardmann and Alessandro Ispano

VfS Annual Conference 2016 (Augsburg): Demographic Change from Verein für Socialpolitik / German Economic Association

Abstract: We study the disclosure decision and price-setting behavior of competing firms in the presence of cursed consumers, who fail to be sufficiently skeptical about a firm's quality upon observing non-disclosure of quality-relevant information. We show that neither competition nor the presence of sophisticated consumers necessarily offer protection to cursed consumers. Exploitation arises if markets are vertically differentiated, if there are many sophisticated consumers, and if it is more likely ex ante that product quality is high. Information campaigns that seek to educate consumers may encourage exploitation and decrease social welfare. Mandatory disclosure laws restore efficiency, but at the cost of redistributing rents from consumers to firms. Our simple model delivers a rich set of positive results, captures important markets, like those for food and consumer finance, and speaks to several recent policy initiatives aimed at consumer protection.

JEL-codes: D03 D40 D83 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-com, nep-mic and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc16:145573

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