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Cursed Consumers and the Effectiveness of Consumer Protection Policies

Alessandro Ispano and Peter Schwardmann

Journal of Industrial Economics, 2023, vol. 71, issue 2, 407-440

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.

Date: 2023
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https://doi.org/10.1111/joie.12332

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Working Paper: Cursed Consumers and the Effectiveness of Consumer Protection Policies (2023) Downloads
Working Paper: Cursed Consumers and the Effectiveness of Consumer Protection Policies (2021) Downloads
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Journal of Industrial Economics is currently edited by Pierre Regibeau, Yeon-Koo Che, Kenneth Corts, Thomas Hubbard, Patrick Legros and Frank Verboven

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