Behavioural Economics Competition over cursed consumers Competition over cursed consumers *

Alessandro Ispano, Peter Schwardmann, Alessandro Ispano, Peter Schwardmann, Yves Breitmoser, David Ettinger, Erik Eyster, Fabian Gaessler, Jeanne Hagenbach, Doh-Shin Jeon, Laurent Linnemer, Takeshi Murooka (+3 others)
unpublished
We model firms' quality disclosure and pricing in the presence of cursed consumers , who fail to be sufficiently sceptical about non-disclosed quality. We show that neither competition nor the presence of sophisticated consumers necessarily protect cursed consumers from being exploited. Exploitation arises if markets are vertically differentiated, if there are only a few cursed consumers, and if average product quality is high. Three common policy measures aimed at consumer protection , i.e.
more » ... datory 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.
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