Shrouded Attributes and the Curse of Educatoin

David Laibson and Xavier Gabaix

No 673, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: Some consumers fail to observe shrouded product attributes when they buy a new product. For example, an account holder may not know their bank's fee schedule. Firms will choose high shrouded fees and compete to attract consumers with loss-leader base goods: e.g., banks will offer free gifts for opening an account and then snare naive consumers with high fees for bouncing a check. Sophisticated consumers take the free gifts and avoid the shrouded fees. Under weak conditions, firms will not be able to profitably attract consumers by advertising low add-on prices, since sophisticated consumers would rather pool with naive consumers at shrouded firms then switch to transparent firms with low add-on fees and no free gifts. Bertrand competition breaks down and monopoly pricing of the add-on persists even in markets with high levels of competition and costless advertising

Keywords: bounded rationality; behavioral economics; behavioral industrial organization; shrouded attributes; loss leader; myopia; add-on; profit center; complexity; confusion; discrete choice. (search for similar items in EconPapers)
JEL-codes: D00 D80 L00 (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed004:673

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