Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets
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Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets
| Title: | Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets |
| Author: |
Gabaix, Xavier; Laibson, David I.
Note: Order does not necessarily reflect citation order of authors. |
| 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. |
| Full Text & Related Files: |
Laibson_ShroudedAttributes.pdf (151.4Kb; PDF) 
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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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