Spurious Complexity and Common Standards in Markets for Consumer Goods

Abstract

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.

Keywords: decision-making, naïve consumers, savvy consumers, price competition, common standard effect, cognitive limitations

JEL Classification: D83, L13, L15, L51