Working Paper: CEPR ID: DP11284
Authors: Roman Inderst; Martin Obradovits
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 Codes: D11; D18; D21; D43; D60; L11; L13; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Competition on headline prices (D41) | lower product quality (L15) |
| Consumer biases towards salient prices (D91) | lower product quality (L15) |
| Effective consumer protection (D18) | unshrouding hidden charges (Y30) |
| unshrouding hidden charges (Y30) | improved market outcomes (D47) |
| Competition + Consumer protection (L40) | improved market outcomes (D47) |