Shrouded attributes, consumer myopia and information suppression in competitive markets

Xavier Gabaix and David Laibson

Chapter 3 in Handbook of Behavioral Industrial Organization, 2018, pp 40-74 from Edward Elgar Publishing

Abstract: Bayesian consumers infer that hidden add-on prices (e.g., the cost of ink for a printer) are likely to be high prices. If consumers are Bayesian, firms will not shroud information in equilibrium. However, shrouding may occur in an economy with some myopic (or unaware) consumers. Such shrouding creates an inefficiency, which firms may have an incentive to eliminate by educating their competitors’ customers. However, if add-ons have close substitutes, a “curse of debiasing†arises, and firms will not be able to debias consumers profitably by unshrouding add-ons. In equilibrium, two kinds of exploitation coexist. Optimizing firms exploit myopic consumers through marketing schemes that shroud high-priced add-ons. In turn, sophisticated consumers exploit these marketing schemes. It is not possible to profitably drive away the business of sophisticates. It is also not possible to profitably lure either myopes or sophisticates to non-exploitative firms. We show that informational shrouding flourishes even in highly competitive markets, even in markets with costless advertising, and even when the shrouding generates allocational inefficiencies.

Keywords: Economics and Finance (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.elgaronline.com/view/edcoll/9781784718978/9781784718978.00009.xml (application/pdf)
Our link check indicates that this URL is bad, the error code is: 503 Service Temporarily Unavailable

Related works:
Journal Article: Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets (2006)
Working Paper: Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets (2006)
Working Paper: Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:elg:eechap:16609_3

Ordering information: This item can be ordered from
http://www.e-elgar.com

Access Statistics for this chapter

More chapters in Chapters from Edward Elgar Publishing
Bibliographic data for series maintained by Darrel McCalla ().