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Unshrouding for Competitive Advantage

Authors


  • In preparing this paper I have greatly benefited from comments made by two anonymous referees, Markus Fels, Paul Heidhues, Fabian Herweg, and Matthias Kräkel. I also thank seminar audiences in Bonn and participants at the Nordic Behavioral Conference 2010 in Helsinki, the IO Workshop 2010 at the ESMT Berlin, and the Behavioral Economics Workshop 2011 at the ESMT Berlin. All remaining errors are my own responsibility. This work was supported by the Bonn Graduate School of Economics.

Abstract

In a market with hidden product details and systematic consumer biases, firms have the possibility to unshroud and thereby to rectify such market obliquities. While the classical view was that firms will have an incentive to unshroud, Gabaix and Laibson (2006) show that there exist constellations in which firms prefer to leave the market shrouded. Building on that model I introduce a more strategic and long-term dimension of unshrouding which turns out to fundamentally alter the underlying incentives to unshroud. In particular, I show that there exists an incentive to unshroud that stems from differences in add-on profitability and that it is dependent on parameter constellations whether a more profitable or a less profitable firm will want to unshroud.

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