Competition over Cursed Consumers
Alessandro Ispano and
No 7046, CESifo Working Paper Series from CESifo Group Munich
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 neither competition nor the presence of sophisticated consumers necessarily protect cursed consumers from being exploited. Exploitation arises if markets are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common policy measures aimed at consumer protection, i.e. mandatory disclosure, third party disclosure and consumer education may all increase exploitation and decrease welfare. Even where these policies improve overall welfare, they often lead to a reduction in consumer surplus.
Keywords: naïve; cursed; disclosure; consumer protection; labeling; competition (search for similar items in EconPapers)
JEL-codes: C72 D03 D82 D83 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-gth, nep-mic and nep-mkt
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7046
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