Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets
Gabaix and Laibson explain why hidden fees survive competition. Bayesian consumers infer that hidden add-on prices, such as the cost of ink for a printer, are likely to be high, so if all consumers were Bayesian, firms would not shroud information in equilibrium. Shrouding may nonetheless occur in an economy containing some myopic or unaware consumers, and it creates an inefficiency that firms might in principle have an incentive to eliminate by educating their competitors' customers. The paper's central result is that where add-ons have close substitutes, a curse of debiasing arises and firms cannot profitably debias consumers by unshrouding add-ons. In equilibrium, two kinds of exploitation coexist. This is the paper this publication cites whenever a reader asks why some firm does not simply compete by showing the full price.
Gabaix and Laibson explain why hidden fees survive competition. Bayesian consumers infer that hidden add-on prices, such as the cost of ink for a printer, are likely to be high, so if all consumers were Bayesian, firms would not shroud information in equilibrium. Shrouding may nonetheless occur in an economy containing some myopic or unaware consumers, and it creates an inefficiency that firms might in principle have an incentive to eliminate by educating their competitors' customers. The paper's central result is that where add-ons have close substitutes, a curse of debiasing arises and firms cannot profitably debias consumers by unshrouding add-ons. In equilibrium, two kinds of exploitation coexist. This is the paper this publication cites whenever a reader asks why some firm does not simply compete by showing the full price.
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Gabaix, X., & Laibson, D. (2006). 'Shrouded attributes, consumer myopia, and information suppression in competitive markets.' Quarterly Journal of Economics, 121(2), 505-540. Shrouding may occur in an economy with some myopic or unaware consumers; where add-ons have close substitutes a curse of debiasing arises and firms cannot profitably debias consumers by unshrouding. doi:10.1162/qjec.2006.121.2.505
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https://doi.org/10.1162/qjec.2006.121.2.505
DOI: 10.1162/qjec.2006.121.2.505