Events at CERGE-EI

Prof. Paul Heidhues

Heinrich-Heine-Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE), Germany

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Authors: Paul Heidhues, Johannes Johnen, and Botond Köszegi

Abstract: We identify a novel competition-policy-based argument for regulating the secondary features of complex or complexly-priced products when consumers have limited attention and therefore face a tradeoff between superficially understanding more products (browsing) and fully understanding fewer products (studying). Interventions limiting ex-post consumer harm through safety regulations, a strict liability regime, an unfair contract terms principle, or other methods free consumers from worrying about the regulated features, enabling them to do more browsing and thereby enhancing competition. We show that for a pro-competitive effect to obtain, the regulation must apply to the secondary features, and not to the total price or value of the product, and it might have to be broad in scope. Furthermore, the benefits of regulating some markets may manifest themselves in other markets. As an auxiliary positive prediction, we establish that because low-value consumers are often more likely to study than high-value consumers, the average price consumers pay can be increasing in the share of low-value consumers. This prediction helps explain why a number of essential products are more expensive in lower-income neighborhoods.
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Full Text:  “Browsing versus Studying: A Pro-Market Case for Regulation”