Working Paper: NBER ID: w11755
Authors: Xavier Gabaix; David Laibson
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 non-exploitative 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.
Keywords: Consumer Myopia; Information Suppression; Competitive Markets
JEL Codes: D00; D60; D80; L00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| myopic consumers (D12) | shrouded addon prices (Y70) |
| shrouded addon prices (Y70) | market inefficiencies (G14) |
| sophisticated consumers (D12) | exploit shrouded prices (G13) |
| competitive pressure (L11) | eliminate shrouding (Y60) |
| myopic consumers (D12) | stable equilibrium for shrouding (C62) |