A Note on the Regulation of Add-ons

Meenakshi Ghosh

MPRA Paper from University Library of Munich, Germany

Abstract: We model a situation where a seller trades a base good, and a bundle of higher quality comprising of the base good with an add-on, through an intermediary which charges a flat commission fee each time it makes a sale. In addition, the add-on can also be bought elsewhere, i.e. from a different provider, on a stand-alone basis. Apart from differences in valuations of quality and their distance from the seller, consumers differ in their levels of sophistication. Specifically, we assume that there is a fraction of consumers who are naive and either unaware that add-ons can be purchased separately from a different provider, or unwilling to deviate (de-select) from the options that have been set for them by default by a seller. This paper examines the impact of regulation (proposed, for instance, by the Financial Conduct Authority in the UK), that requires intermediaries to prompt consumers regarding the availability of stand-alone alternatives. We find that, ironically, regulation that seeks to protect the interests of the naive consumers may sometimes be detrimental to their welfare.

Keywords: add-on pricing; consumer naivete; regulation; platform fee; cost pass-through (search for similar items in EconPapers)
JEL-codes: L11 L15 (search for similar items in EconPapers)
Date: 2022-06-24
New Economics Papers: this item is included in nep-com, nep-ind, nep-pay and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:113549

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