Browsing versus Studying: A Pro-Market Case for Regulation

Heidhues, Paul [Heinrich Heine University Duesseldorf and Duesseldorf Institute for Competition Economics] Johnen, Johannes [UCL] Koszegi, Botond [Central European University]

We identify a competition-policy-based argument for regulating the secondary features ofcomplex or complexly-priced products when consumers have limited attention. Limited attention implies that consumers can only “study” a small number of complex products in full, while—by failing to check secondary features—they can superficially “browse” more. Interventions limiting ex-post consumer harm through safety regulations, caps on certain fees, or other methods free consumers from worrying about the regulated features, enabling them to do more or more meaningful browsing and thereby enhancing competition. We show that for a pro-competitive effect to obtain, the regulation must apply to the secondary features, and not to the total price or value of the product. As an auxiliary positive prediction, we establish that because low-value consumers are often more likely to study—and therefore less likely tobrowse—than high-value consumers, the average price consumers pay can be increasing in the share of low-value consumers. We discuss applications of our insights to health-insurance choice,the European Union’s principle on unfair contract terms, food safety in developing countries,and the shopping behavior of (and prices paid by) low-income and high-income consumers.