Shrouded Attributes and the Curse of Educatoin

Some consumers fail to observe shrouded product attributes when they buy a new product. For example, an account holder may not know their bank's fee schedule. Firms will choose high shrouded fees and compete to attract consumers with loss-leader base goods: e.g., banks will offer free gifts for opening an account and then snare naive consumers with high fees for bouncing a check. Sophisticated consumers take the free gifts and avoid the shrouded fees. Under weak conditions, firms will not be able to profitably attract consumers by advertising low add-on prices, since sophisticated consumers would rather pool with naive consumers at shrouded firms then switch to transparent firms with low add-on fees and no free gifts. Bertrand competition breaks down and monopoly pricing of the add-on persists even in markets with high levels of competition and costless advertising