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

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

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Title: Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets
Author: Gabaix, Xavier; Laibson, David I.

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Citation: Gabaix, Xavier, and David Laibson. 2006. Shrouded attributes, consumer myopia, and information suppression in competitive markets. Quarterly Journal of Economics 121(2): 505-540.
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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.
Published Version: doi:10.1162/qjec.2006.121.2.505
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:4554333

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  • FAS Scholarly Articles [7588]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University
 
 

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