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A Note on the Regulation of Add-ons

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  • Ghosh, Meenakshi

Abstract

We model a situation where a seller trades a base good, and a bundle of higher quality comprising of the base good with an add-on, through an intermediary which charges a flat commission fee each time it makes a sale. In addition, the add-on can also be bought elsewhere, i.e. from a different provider, on a stand-alone basis. Apart from differences in valuations of quality and their distance from the seller, consumers differ in their levels of sophistication. Specifically, we assume that there is a fraction of consumers who are naive and either unaware that add-ons can be purchased separately from a different provider, or unwilling to deviate (de-select) from the options that have been set for them by default by a seller. This paper examines the impact of regulation (proposed, for instance, by the Financial Conduct Authority in the UK), that requires intermediaries to prompt consumers regarding the availability of stand-alone alternatives. We find that, ironically, regulation that seeks to protect the interests of the naive consumers may sometimes be detrimental to their welfare.

Suggested Citation

  • Ghosh, Meenakshi, 2022. "A Note on the Regulation of Add-ons," MPRA Paper 113549, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:113549
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    add-on pricing; consumer naivete; regulation; platform fee; cost pass-through;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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