Spurious Complexity and Common Standards in Markets for Consumer Goods
Max Planck Institute of Economics
University of East Anglia - School of Economics
CCP Working Paper No. 07-20
Behavioural and industrial economists have argued that, because of cognitive limitations, consumers are liable to make sub-optimal choices in complex decision problems. Firms can exploit these limitations by introducing spurious complexity into tariff structures, weakening price competition. This paper models a countervailing force. Consumers' choice problems are simplified if competing firms follow common conventions about tariff structures. Because such a 'common standard' promotes price competition, a firm's use of it signals that its products offer value for money. If consumers recognize this effect, there can be a stable equilibrium in which firms use common standards and set competitive prices.
Number of Pages in PDF File: 36
Keywords: decision-making, naïve consumers, savvy consumers, price competition, common standard effect, cognitive limitations
JEL Classification: D83, L13, L15, L51working papers series
Date posted: December 5, 2007
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