Shrouded Attributes

What it is

Printer ink. The fee on the transfer. The excess on the policy. The delivery charge that appears at the last screen.

Gabaix and Laibson's result is that with perfectly attentive consumers, shrouding would not survive, because a hidden add-on would simply be assumed expensive. In a market containing some myopic or unaware consumers, it can persist.

In effect

The uncomfortable part is what happens to a firm that tries to fix it. You would expect a competitor to compete by unshrouding: telling your customers what they are really paying.

Where add-ons have close substitutes, Gabaix and Laibson show a curse of debiasing arises, and firms cannot profitably debias consumers this way. In equilibrium, two kinds of exploitation coexist.

So honesty about hidden costs can go commercially unrewarded, which is why the practice outlasts every round of outrage about it.

What it does not say

It does not say consumers are stupid. The model requires only that some are inattentive, which is a description of everybody on some purchases.

It also does not say competition fixes this. Chioveanu and Zhou show firms competing on price frames as well as prices, randomising frames to obfuscate comparison, and find that more competitors can mean more frame complexity, higher industry profits and lower consumer surplus.

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