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Excessive Competition On Headline Prices

Author

Listed:
  • Roman Inderst
  • Martin Obradovits
Abstract
In a variety of purchasing situations, consumers may focus primarily on headline prices, disregarding the full costs associated with acquiring and maintaining a product or service contract. Even when this is the case, the literature has delineated various circumstances where intense competition can protect consumers through the so‐called “waterbed effect.” In this article, we however show that when consumers have context‐dependent preferences, competition may rather exacerbate their and society's harm by distorting product choice and provision. Then, consumer protection policy must sufficiently constrain hidden fees so that competition, along with high‐quality firms' incentives to educate consumers, can restore efficiency.

Suggested Citation

  • Roman Inderst & Martin Obradovits, 2023. "Excessive Competition On Headline Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 783-808, May.
    • Handle: RePEc:wly:iecrev:v:64:y:2023:i:2:p:783-808
    DOI: 10.1111/iere.12616
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    Cited by:

    1. Célérier, Claire & Vallée, Boris, 2016. "Catering to investors through product complexity," ESRB Working Paper Series 14, European Systemic Risk Board.
    2. Ghosh, Meenakshi, 2022. "A Note on the Regulation of Add-ons," MPRA Paper 113549, University Library of Munich, Germany.
    3. Ghosh, Meenakshi, 2021. "Consumer naivete and competitive add-on pricing on platforms," MPRA Paper 109981, University Library of Munich, Germany.
    4. Dertwinkel-Kalt, Markus & Köster, Mats, 2020. "Attention to online sales: The role of brand image concerns," DICE Discussion Papers 335, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    5. Markus Dertwinkel‐Kalt & Mats Köster, 2022. "Attention to online sales: The role of brand image concerns," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(1), pages 64-89, February.

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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D60 - Microeconomics - - Welfare Economics - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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