TILEC Seminar: Johannes Johnen (KU Leuven) | “Regulation in Economies with Limited Consumer Protection” (joint work with with Paul Heidhues and Botond Koszegi)

Abstract

We develop a model of an economy in which consumers are interested in making many purchases, but have limited attention to examine relevant prices and product features (e.g., add-on fees or product safety). Our goal is to analyze effects of consumer-protection regulation (e.g., caps on fees, safety standards) spanning multiple markets. Such protection from post-purchase harm  lowers the attention necessary for valuable purchases, which can raise consumer welfare in two qualitatively different ways. First, freed-up attention may be used by the consumer to purchase in more markets. Second, when ``spare'' --- i.e., in equilibrium unused --- attention becomes available, it generates competition. The first benefit tends to be most important at the stage where the planner regulates relatively few markets, and the second when the planner's regulatory scope reaches a sufficiently high level. Because little spare attention can enforce competition in many markets, consumer welfare can be highly non-linear in the planner's regulatory scope. The benefits of regulating a market often accrue in other markets, so regulation can be beneficial even if it is not binding in equilibrium and does not change prices and volume in the regulated market. Furthermore, there is a sense in which overly tight regulation outperforms overly lax regulation. Broad consumer protection can help the economy reach productive efficiency, and when this is achieved such broad regulation may become unnecessary.

Speaker: Johannes Johnen

Time: 10:45-11:45 hrs

Host: Shiva Shekhar
Moderator: Konrad Borowicz