Economists Do It With Models

Warning: “graphic” content…

Bookmark and Share
On Shrouded Attributes And Easter Bunnies…

April 2nd, 2010 · 8 Comments
Behavioral Econ · Buyer Beware

My mom sent me the following a few days ago:

The economics of Easter bunny owning:

See what a great sidekick I’d make for you. 🙂 Just like Ellen’s mom.

She’s right, on both counts. To summarize the article:

  • Bunnies are living creatures, not toys.
  • The follow-on costs to owning a bunny- food, vet bills, replacement of things that bunnies chew through, etc.- greatly outweigh the initial purchase price of the bunny but are nonetheless often ignored in the bunny purchasing decision.
  • There’s no “free disposal,” as economists put it, when it comes to bunnies. You can’t (well, shouldn’t) just set it free outside, and many shelters don’t know what to do with bunnies and end up euthanizing them.
  • See point 1. Also, bunnies can live for up to 15 years, and, unlike the real Easter bunny, they don’t go into hiding 51 weeks out of the year.

Economists call these follow-on costs “shrouded attributes,” since they aren’t necessarily made obvious to the consumer. It’s pretty clear that people should take these shrouded attributes into account as much as possible when making a consumption decision (businesspeople would call this calculation the “total cost of ownership”), but it turns out that people aren’t always good at doing so. (The typical example given is that people don’t properly account for the cost of ink when deciding what printer to buy.) So what happens in markets where there are shrouded attributes?

Here’s what professors Xavier Gabaix and David Laibson have to say on the matter:

Following Becker (1957) we ask whether competition will eliminate the effects of behavioral biases. We study the case of shrouded product attributes, such as maintenance costs, expensive add-ons, and hidden fees. In standard competitive models with costless advertising all firms choose to reveal all product information. We show that information revelation breaks down when some naive consumers do not anticipate shrouded attributes. Firms will not compete by publicly undercutting their competitors’ add-on prices if (i) add-ons have close substitutes that are only exploited by sophisticated consumers, or (ii) many consumers drop out of the market altogether when the add-on market is made salient. We show that informational shrouding flourishes even in highly competitive markets, even in markets with costless advertising and even when the shrouding generates allocational inefficiencies. In equilibrium, two kinds of exploitation coexist. Optimizing firms exploit naïve consumers through marketing schemes that shroud negative product information. In turn, sophisticated consumers exploit these marketing schemes. It is not profitable to try and lure either of them to non-exploitative firms. As a result, the distortions due to consumer biases persist across a wide range of markets.

Uh, okay…let me translate: If there are people who don’t pay attention to shrouded attributes (read, follow-on costs) in their decision-making processes, firms have an incentive to not compete on price when it comes to these items. (This is why printer ink is so expensive, in case you were curious.) Companies take advantage of people who don’t pay attention, and people who do pay attention can game the system and essentially be subsidized by the people who don’t pay attention. These market inefficiencies can persist even in otherwise competitive industries.

Further translation: Don’t be dumb, sparky.

Don’t be turned off by the abstract- the paper itself (or at least the introduction, if you aren’t so into the formal mathematical models) is pretty interesting.

If you are really insistent on getting into the Easter spirit, might I suggest some clever repurposing:

(Sidenote: I will mostly understand if you feel the need to call the ASPCA on me.)

Or, if you don’t have a pet around, you could always get into the Easter spirit with some Peeps sushi:

Happy (early) Easter! 🙂

Tags: Behavioral Econ · Buyer Beware

8 responses so far ↓

  • 1 tamara // Apr 3, 2010 at 2:30 am

    a) your mom is cute and you should totally give her a cape and formally appoint her your sidekick
    b) what’s she doing reading articles about bunnies xD
    c) that doggy with the bunny ear has some big eyes O_O
    happy easter and keep thinking economics

  • 2 Alex Rodriguez // Apr 3, 2010 at 2:32 pm

    haha so MOST people don’t consider ink costs when buying a printer… most people aren’t economists either because that’s EXACTLY what i did a couple of weeks ago.
    the first time my mom and sisters had gone and all they were comparing were printer prices and which one matched the computer better…. good thing they made me go on the 2nd trip =P

  • 3 tamara // Apr 4, 2010 at 1:13 am

    yeah, but sometimes this hidden costs even if you’re aware they unavoidable because they are complements. Im talking about the example Jodie is mentioned. You cannot have a printer without ink. When you buy a car you look for a fuel efficent car but you are not concern about things like the cost of tail light (may it breaks or something)
    is a very interesting post. You keep coming out with things that apply to microeconomics aware of.

  • 4 Altereggo // Apr 8, 2010 at 5:38 pm

    “There’s no “free disposal,” as economists put it, when it comes to bunnies.”

    Very true. One must consider the spot price of onions and plum sauce some time after the purchase, unless you have access to a very small futures market for produce :D.

  • 5 econgirl // Apr 8, 2010 at 8:27 pm


    I’m really not sure how bunnies got past the “pets are not food” rule…

    My mom bought me a rabbit fur coat when I was little and told me that the bunnies died of natural causes. I am still bitter about this.

  • 6 Altereggo // Apr 8, 2010 at 9:26 pm

    Eh, I spend time in France, and they’ll eat anything that’s not a vegetable.
    Plus, my father’s family got through the Blitz on rabbit and poached swan. The meat ration of sawdust-sausages didn’t stretch too far.

    So yeah, we’ve probably got very different utility functions for the consumption of cute & tasty things.

  • 7 Brishen // Apr 13, 2010 at 11:11 am

    Sure there are costs not initially seen with rabbits, but the literal entertainment value overshadows them. Also rabbits own

  • 8 Beverly1786 // Dec 6, 2011 at 7:44 am

    Awesome post! I’ve been trying to come up with a good internet business idea for a while. Instead, I have come up with a great non-internet business idea, which kind of sucks in a way because this idea requires a lot of money, as opposed to a full internet-based business that might not require that much to get it started. I’m not giving up though. I recently started a blog where I plan to document my steps for starting my company. I figured it would keep me motivated and force me to keep at it. I also hope it will motivate the readers to keep trying to accomplish their goals. By the way, I love your site. I’ll be adding it to my list of interesting blogs.

Leave a Comment