Integrating Consumer Behaviour Insights in Competition Enforcement - David Laibson -June 2022 OECD Discussion
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This presentation by David Laibson (Professor, Harvard University) was made during the discussion “Integrating Consumer Behaviour Insights in Competition Enforcement” held for competition authorities’ officials on 24 June 2022. More materials on the topic can be found at oe.cd/bice. This presentation was uploaded with the author’s consent.
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Integrating Consumer Behaviour Insights in Competition Enforcement - David Laibson -June 2022 OECD Discussion
- 1. Behavioral Economics and Competition Policy David Laibson Robert I. Goldman Professor of Economics Harvard University June 24, 2022 OECD Roundtable on Consumer Behavior and Competition Enforcement
- 2. Shrouding and the Curse of Education § Firms do not have an incentive to educate or debias consumers if debiased consumers are not profitable. § “Curse of education”: educating the consumer makes the consumer less profitable.
- 3. Examples of education that will make a consumer less profitable § “Actively managed mutual funds perform worse (after fees) than passively managed funds.” § “Printer ink costs $400 per year.” § “The typical bank account holder pays $100 per year in add-on fees.”
- 5. Firms use drip pricing to shroud $s of the price Consumer surlus Producer surplus s Demand Supply Consumer surplus Producer surplus Price Quantity
- 6. Firms use drip pricing to shroud $s of the price Consumer surlus Producer surplus s + Demand Supply Producer surplus - - Price Quantity
- 7. + s Demand Supply Firms use drip pricing to shroud $s of the price + Price Quantity
- 9. Properties of the shrouded equilibrium § Social surplus falls § Consumer surplus falls by (much) more § Producer surplus rises
- 10. Worse news § The consumer welfare losses are likely to be concentrated among the consumers who have low levels of economic literacy (“regressive” welfare consequences)
- 11. Welfare consequences for sophisticated consumers Consumer surlus Producer surplus s + Demand Supply Producer surplus - Price Quantity
- 12. Consumer surlus Producer surplus s + Demand Supply Producer surplus - - Price Quantity Welfare consequences for myopic consumers
- 13. Competitive pressure may not lead to unshrounding § Producer surplus falls with unshrouding. § There may be no competitive force that encourages unshrouding – the curse of education: giving consumers more information makes them less profitable to the firms – Gabaix and Laibson (2006)
- 14. More bad news: Shrouding often produces cross-subsidies from myopes to sophisticates § Sophisticates pool with myopes at firms with loss-leader base-goods, where only the myopic consumers pay the high “hidden” fees. § “Get the free bank services without paying the hidden fees.” § Competitive equilibrium includes cross- subsidies from myopes to sophisticates. § Competitive equilibrium does not maximize social welfare.
- 15. Social surplus with shrouding. s Demand Supply + Price Quantity + -