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

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Author Info
Xavier Gabaix
David Laibson

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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 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11755.

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Date of creation: Nov 2005
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Handle: RePEc:nbr:nberwo:11755

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Find related papers by JEL classification:
D00 - Microeconomics - - General - - - General
D60 - Microeconomics - - Welfare Economics - - - General
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
L00 - Industrial Organization - - General - - - General

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