First thank you for the thoughtful response. This is more what I was hoping for when I posted... I don't agree with you signaling story but it is something I would not have considered.
"price discrimination" I don't think this is at all a story of signaling. I think it is a story of information/time costs.
My stories: If my wife picks up the circular at the store entrence and tells me that if I rip out this page an hand it to the cashier I will save a buck I do so. Most people don't do their health savings accounts or mail into NYC to have their metro cards mailed to them so they can save a few bucks by deducting the cost. Do you think most people pay more taxes then they need to because they are signaling? Tell me your signaling story.
To the paper being convincing. Be specific. I bet that your story will involve agents who can not defect or some external structure which alters incentives. My story is very close to that of the paper. That people who care "sophisticated" will prefer systems in which they can obtain an advantage.
I'm expanding the strict definition of price discrimination by including taxes ect but believe they are the same. By doing so I think it can be seen that price discrimination is a supply and demand side. In addition I would argue that because I am talking about systems that it is an emergent phenomena. Agents within a system shroud. Does your car mechanic or IT guy tell you the exact truth or do they pad things just a little. Do teammates working on a project ever slack but make it look like they are doing work?
Do you think most people pay more taxes then they need to because they are signaling?
No; I think they are trading off compliance costs vs. the risk of paying more taxes than they owe. But it's not clear that the price discrimination story is applicable here.
To the paper being convincing. Be specific.
Basically, the problem with Gabaix--Laibson is that its "myopic" consumers are persistently biased in addition to having bounded rationality. They persistently expect to be charged less e.g. for the hotel stay than they actually are. A boun...
Opaque fragile systems/institutions dominate.
“Out of the crooked timber of humanity no straight thing was ever made.”
All systems compete against each other for users. I believe opaque fragile systems dominate transparent robust systems. First I believe individuals choose shrouded systems more tightly bounding their rationality. Second I believe even when individuals know a system is fragile they believe they will not be victim to its fragility; the greater fools will be.
First sophisticated consumers like price discrimination while myopic consumers are ignorant they are being discriminated against or unwilling to commit the time needed to exploit the system. Information asymmetry is a feature of the system not a bug.
See “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets” http://aida.wss.yale.edu/~shiller/behmacro/2003-11/gabaix-laibson.pdf for more detail.
Second sophisticated individuals, even when they perceive the system to be fragile, often subscribe to the the greater fool theory. They feel they will win out over the greater fools, but they do not understand how tightly bound their rationality has become due to the layers upon layers of shrouding. The myopics of course are largely ignorant of the risks.
This is a very pessimistic view that offers no solution to the problem of system fragility. I think though most solutions to fragility only create larger equally fragile systems.