TY - JOUR AU - Gabaix,Xavier AU - Laibson,David TI - Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets JF - National Bureau of Economic Research Working Paper Series VL - No. 11755 PY - 2005 Y2 - November 2005 UR - http://www.nber.org/papers/w11755 L1 - http://www.nber.org/papers/w11755.pdf N1 - Author contact info: Xavier Gabaix New York University Finance Department Stern School of Business 44 West 4th Street, 9th floor New York, NY 10012 Tel: 212-998-0257 Fax: 212-995-4233 E-Mail: xgabaix@stern.nyu.edu David Laibson Department of Economics Littauer M-12 Harvard University Cambridge, MA 02138 Tel: 617/496-3402 Fax: 617/495-8570 E-Mail: dlaibson@gmail.com AB - 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. ER -