Excessive Competition for Headline Prices
36 Pages Posted: 13 May 2016 Last revised: 5 Feb 2021
There are 2 versions of this paper
Excessive Competition for Headline Prices
Excessive Competition for Headline Prices
Date Written: January 02, 2021
Abstract
When firms can hide charges and consumers are prone to salient or relative thinking, this may have severe welfare consequences. The ensuring greater competition on headline prices, far from protecting consumers, may distort their choice and induce firms to offer inefficiently low product quality. As more intense competition leads to a larger pass-through of shrouded charges into lower headline prices, which aggravates these problems, competition policy alone cannot correct market outcomes. When competition is however complemented by effective consumer protection, high-quality firms have sufficient incentives to unshroud hidden charges, disciplining firms’ choice of quality and restoring efficiency.
Keywords: Shrouded Charges, Hidden Fees, Price Competition, Shopping, Attention, Salience, Unshrouding
JEL Classification: D11, D18, D21, D43, D60, L11, L13, L15
Suggested Citation: Suggested Citation