Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education

Michael Kosfeld and Ulrich Schüwer ()
Additional contact information
Ulrich Schüwer: Goethe University Frankfurt

No 6061, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Previous research shows that firms shroud high add-on prices in competitive markets with naive consumers leading to inefficiency. We analyze the effects of regulatory intervention via educating naive consumers on equilibrium prices and welfare. Our model allows firms to shroud, unshroud, or partially unshroud add-on prices. Results show that consumer education may increase welfare; however, it may also decrease welfare if education is insufficient to alter the equilibrium information and pricing strategy of firms. Educating consumers may do more harm than good and should thus only be considered if the regulator is sufficiently well informed about consumer and firm behavior.

Keywords: welfare; regulation; competition; bounded rationality; consumer protection (search for similar items in EconPapers)
JEL-codes: D40 D80 L50 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2011-10
New Economics Papers: this item is included in nep-com, nep-mkt and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published - published as 'Add-on Pricing in Retail Financial Markets and the Fallacies of Consumer Education' in: Review of Finance, 2017, 21 (3), 1189 - 1216

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Working Paper: Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education (2011)
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