Working Paper: CEPR ID: DP8636
Authors: Michael Kosfeld; Ulrich Schwer
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; consumer protection; regulation; welfare
JEL Codes: D40; D80; L50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumer Education (G53) | Consumer Behavior (D19) |
| Consumer Education (G53) | Welfare (I38) |
| Consumer Behavior (D19) | Market Equilibrium (D53) |
| Regulatory Intervention (L51) | Market Equilibrium (D53) |
| Price Discrimination (D40) | Welfare Effects (D69) |
| Consumer Education (G53) | Negative Effects on Other Consumers (D19) |
| Regulatory Intervention (L51) | Welfare (I38) |
| Price Discrimination (D40) | Market Efficiency (G14) |