Add-On Pricing in Retail Financial Markets and the Fallacies of Consumer Education

Review of Finance, Vol. 21, Issue 3, pp. 1189–1216
Michael Kosfeld,
Ulrich Schüwer
Reseach Area:
Household Finance

This paper explores consequences of consumer education on prices and welfare in retail financial markets when some consumers are naive about shrouded add-on prices and firms try to exploit it. Allowing for different information and pricing strategies we show that education is unlikely to push firms to disclose prices towards all consumers, which would be socially efficient. Instead, price discrimination emerges as a new equilibrium. Further, due to a feedback on prices, education that is good for consumers who become sophisticated may be bad for consumers who stay naive and even for the group of all consumers as a whole.

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