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! 🙂