We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
SHROUDED ATTRIBUTES, CONSUMER MYOPIA, AND INFORMATION SUPPRESSION IN COMPETITIVE MARKETS.
- Authors
Gabaix, Xavier; Laibson, David
- Abstract
Bayesian consumers infer that hidden add-on prices (e.g., the cost of ink for a printer) are likely to be high prices. If consumers are Bayesian, firms will not shroud information in equilibrium. However, shrouding may occur in an economy with some myopic (or unaware) consumers. Such shrouding creates an inefficiency, which firms may have an incentive to eliminate by educating their competitors' customers. However, if add-ons have close substitutes, a "curse of debiasing" arises, and firms will not be able to profitably debias consumers by unshrouding add-ons. In equilibrium, two kinds of exploitation coexist. Optimizing firms exploit myopic consumers through marketing schemes that shroud high-priced add-ons. In turn, sophisticated consumers exploit these marketing schemes. It is not possible to profitably drive away the business of sophisticates. It is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms. We show that informational shrouding flourishes even in highly competitive markets, even in markets with costless advertising, and even when the shrouding generates allocational inefficiencies.
- Subjects
BAYESIAN analysis; ECONOMIC competition; CONSUMERS; MARKETING; PRICES; PROFITABILITY; STATISTICAL decision making; FINANCIAL performance; DECISION making
- Publication
Quarterly Journal of Economics, 2006, Vol 121, Issue 2, p505
- ISSN
0033-5533
- Publication type
Article
- DOI
10.1162/qjec.2006.121.2.505