Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets

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ID: 292340
2006
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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.
Reference Key
openalex_W3122035289 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Xavier Gabaix, David Laibson
Journal the quarterly journal of economics
Year 2006
DOI
10.1162/qjec.2006.121.2.505
URL
https://doi.org/10.1162/qjec.2006.121.2.505
Keywords Keywords not found

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