Seminar in Microeconomics - Philipp Brunner (University of Bern)

A common yet controversial practice involves advertising a base product's price up-front, while disclosing additional fees for optional add-ons only during the purchase process. We study such an after-sales market with consumers who compare the price of the add-on to the base good price, a behavior that temporarily increases add-on demand. Our model incorporates multiple behavioral microfoundations to account for this phenomenon, including relative thinking and salience. The presence of such behavioral consumers has non-monotonic effects on the surplus of classical consumers, and well-intentioned policies aimed at educating consumers may actually decrease consumer surplus.