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What you don't know can cost you -- but your ignorance helps someone else save a bundle, according to The New York Times:

When Xavier Gabaix and David Laibson open a hotel room minibar, they see among the tiny liquor bottles and European chocolates a perpetual battle between companies charging hidden fees and the sophisticated consumer trying to avoid them.

The two economics professors -- Mr. Laibson at Harvard and Mr. Gabaix at the Massachusetts Institute of Technology and Princeton -- have looked at how companies hide fees and costs. They found that sophisticated consumers have somehow learned how to game the system by having enough naïve consumers around to subsidize them.

The smartest strategy, they say, is for the sophisticated consumer to choose the service with the most hidden charges and highest add-on prices, but then avoid paying those added costs. "The sophisticated consumer takes advantage of that," Mr. Gabaix said. "The naïve pay all the fees."

OK, that insight may not strike you as being all that revolutionary -- especially if you're a savvy consumer yourself. But the story goes on to detail the efforts by Messrs. Laibson and Gabaix to explain just why the marketplace doesn't self-correct for hidden fees. In other words, why don't companies rat out their rivals?

A company would hurt itself if it described how its competitor loads on the fees, they said.

They argue that drawing attention to the rivals' fees just alerts the sophisticated consumer that the rival is actually offering a better deal. Transparent Hotel could advertise a no-added-fees $100 room and point out that Nontransparent Hotel really charges $145 for its $70 room. If a consumer goes with Nontransparent and avoids the add-on fees, he ends up paying less, the economists said. He would advise going to the hotel with the lowest room rate and avoid any fees, assuming -- which economists love to do -- that factors like location and safety are equal.

The result for the well-meaning company is harsh. Its advertising might hurt the rival in the sense that consumers pay fewer fees there, but it is increasing the number of sophisticated consumers and teaching them to choose the other guys. It is unlikely to draw in the sophisticates. "That business won't make much money once you understand how the world works," Mr. Laibson said. "What's the benefit to the company?"

It is a far better business strategy to have the naïve subsidize the sophisticated. The way the market solves this problem, in other words, is not by educating consumers, but by having the sophisticated consumer exploit the opportunities. Sophisticated consumers are not really taking advantage of companies, nor are companies taking advantage of consumers, as much as companies are helping those sophisticated consumers take advantage of the less sophisticated consumer.

(Via Boing Boing.)