Excessive Competition on Headline Prices

Arbeitspapier

In a variety of purchasing situations, consumers may focus primarily on headline prices, ignoring the full costs associated with acquiring and maintaining a product or service contract. Even when this is the case, it is widely believed that intense competition would adequately protect consumers (the so-called "waterbed effect"). However, in a tractable model of imperfect competition and vertical differentiation, we show that when consumers exhibit context-dependent preferences, competition may rather exacerbate their and society's harm. Then, consumer protection policy must sufficiently constrain hidden costs and fees so that competition, along with high-quality firms' incentives to educate consumers, can restore efficiency.

Object Details

• Language: Englisch

Classification and Topics

• Classification: Wirtschaft ; Consumer Economics: Theory ; Consumer Protection ; Firm Behavior: Theory ; Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection ; Welfare Economics: General ; Production, Pricing, and Market Structure; Size Distribution of Firms ; Oligopoly and Other Imperfect Markets ; Information and Product Quality; Standardization and Compatibility
• Subject: shrouded charges ; hidden fees ; price competition ; shopping ; salience ; unshrouding

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Inderst, Roman ; Obradovits, Martin
• Event: Veröffentlichung
• (who): ZBW – Leibniz Information Centre for Economics
• (where): Kiel, Hamburg
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/253666
• Last update: 10.03.2025, 11:43 AM CET