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

45 Pages Posted: 6 Nov 2011

See all articles by Michael Kosfeld

Michael Kosfeld

Goethe University Frankfurt; IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); University of Bonn - Center for Development Research (ZEF)

Ulrich Schüwer

Goethe University Frankfurt - Department of Finance; Leibniz Institute for Financial Research SAFE

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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: bounded rationality, competition, regulation, welfare, consumer protection

JEL Classification: D40, D80, L50

Suggested Citation

Kosfeld, Michael and Schüwer, Ulrich, Add-On Pricing, Naive Consumers, and the Hidden Welfare Costs of Education. IZA Discussion Paper No. 6061, Available at SSRN: https://ssrn.com/abstract=1955401 or http://dx.doi.org/10.2139/ssrn.1955401

Michael Kosfeld (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business Administration
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Germany

IZA Institute of Labor Economics

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Centre for Economic Policy Research (CEPR) ( email )

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CESifo (Center for Economic Studies and Ifo Institute) ( email )

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University of Bonn - Center for Development Research (ZEF) ( email )

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Ulrich Schüwer

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
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Frankfurt, 60323
Germany

HOME PAGE: http://www.wiwi.uni-frankfurt.de/de/abteilungen/finance/home.html

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://safe-frankfurt.de/

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