Cursed Consumers and the Effectiveness of Consumer Protection Policies

Alessandro Ispano and Peter Schwardmann
Additional contact information
Peter Schwardmann: LMU Munich

No 305, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: We model firms’ quality disclosure and pricing in the presence of cursed consumers, who fail to be sufficiently skeptical about undisclosed quality. We show that cursed consumers are exploited in duopoly markets if firms are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common consumer protection policies that work under monopoly, i.e. mandatory disclosure, third party disclosure and consumer education, may all increase exploitation and decrease welfare. Even where these policies improve overall welfare, they often lead to a reduction in consumer surplus. We show that our conclusions hold in extensions with endogenous quality choice and horizontal differentiation.

Keywords: naive; cursed; disclosure; consumer protection; labeling; competition (search for similar items in EconPapers)
JEL-codes: C72 D03 D82 D83 (search for similar items in EconPapers)
Date: 2021-12-01
New Economics Papers: this item is included in nep-com, nep-mic and nep-reg
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://rationality-and-competition.de/wp-content/uploads/2021/12/305.pdf (application/pdf)

Related works:
Journal Article: Cursed Consumers and the Effectiveness of Consumer Protection Policies (2023)
Working Paper: Cursed Consumers and the Effectiveness of Consumer Protection Policies (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:305

Access Statistics for this paper

More papers in Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition
Bibliographic data for series maintained by Viviana Lalli ().