Consumer Protection and the Incentive to Become Informed

We discuss the impact of consumer protection policies on consumers’ incentives to become informed of the best deals available in the market. In a market with costly information acquisition, we find that imposing a cap on suppliers’ prices reduces the incentive to become informed of market conditions, with the result that prices paid by consumers (both informed and uninformed) may rise. In a related model where consumers have the ability to refuse to receive marketing, we find that this ability softens price competition and can make all consumers worse off. ∗Armstrong, Zhou : Department of Economics, University College London. Vickers: All Souls College, University of Oxford. We are grateful to comments from Michael Castanheira, Maarten Janssen, José Luis Moraga-González and Ivan Png. The support of the Economic and Social Research Council (UK) is gratefully acknowledged.