I just bought a blu-ray player. (Actually my 10 and 7-year old bought it as a birthday gift for my wife; alas, neither they nor she were fooled for long, but I digress.) To get the best performance you need an HDMI cable which must be purchased separately (itself a bit of a mystery since almost every blu-ray is going to be attached to a digital tv). The price difference among brands of HDMI cable are bizarrely large – you can easily spend as much on Monster cable, the brand leader, as on the player itself yet at the same time you can buy decent HDMI cable for virtually nothing at Amazon. The experts are clear that expensive HDMI cable is a ripoff.
There are two puzzles. First, we have a clear case of consumers wasting a reasonable amount of their own money in an area that involves neither politics nor medical care, the irrationalities of which my colleagues have devoted considerable effort to explaining. I will have to go for the P.T. Barnum theory on this one.
The second puzzle is, Why don't any stores stock cheap HDMI cable? I knew cables were a ripoff yet I could not find reasonably priced cables at Best Buy, Radio Shack, Target or even Wal-Mart. Ordinarily, we would expect competition to push prices down but in this case it seem as if the mere existence of Monster is anchoring high prices everywhere but online.
My best guess is that this is an unusually strong version of the hidden fee model of Laibson and Gabaix. In that model, firms overprice one aspect of service–such as a hotel charging exorbitant rates for telephone service–as an idiot tax. Crucially, the idiot tax is matched by an IQ-subsidy; the price of the hotel room is lower than it would be without the idiot tax–so the idiots don't know to shop elsewhere and the high-IQ types are, in fact, drawn to stores with an idiot tax. Thus, buy your blu-ray player at places such as Best Buy which sell a lot of expensive cable as well as massively overpriced extended warranties.