Excessive Competition on Headline Prices

Roman Inderst and Martin Obradovits ()

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: In a variety of purchasing situations, consumers may focus primarily on headline prices, ignoring the full costs associated with acquiring and maintaining a product or service contract. Even when this is the case, it is widely believed that intense competition would adequately protect consumers (the so-called "waterbed effect"). However, in a tractable model of imperfect competition and vertical differentiation, we show that when consumers exhibit context-dependent preferences, competition may rather exacerbate their and society's harm. Then, consumer protection policy must sufficiently constrain hidden costs and fees so that competition, along with high-quality firms' incentives to educate consumers, can restore efficiency.

Keywords: shrouded charges; hidden fees; price competition; shopping; salience; unshrouding (search for similar items in EconPapers)
JEL-codes: D11 D18 D21 D43 D60 L11 L13 L15 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-com, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: EXCESSIVE COMPETITION ON HEADLINE PRICES (2023)
Working Paper: Excessive Competition for Headline Prices (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:253666

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