Price Competition with Consumer Confusion

Abstract

This paper proposes a model in which identical sellers of a homogenous product compete in both prices and price frames (i.e., ways to present price information). Frame choices affect the comparability of price offers, and may lead to consumer confusion. In the symmetric equilibrium price and price frame dispersion coexist and firms make positive profits. Moreover, the nature of equilibrium depends on whether frame differentiation or frame complexity is more confusing, and an increase in the number of firms can raise industry profits and harm consumers.

Keywords: bounded rationality, framing, oligopoly markets, frame dispersion