Spurious Complexity and Common Standards in Markets for Consumer Goods
JENA Economic Research Paper No. 2009-084
31 Pages Posted: 18 Oct 2009
Date Written: October 14, 2009
It has been argued that cognitively constrained consumers respond sub-optimally to complex decision problems, and that firms can exploit these limitations by introducing spurious complexity into tariff structures, weakening price competition. We model a countervailing force. Restricting one’s choices to the most easily comparable options is a psychologically well-attested heuristic. Consumers who use this heuristic favour firms that follow common conventions about tariff structures. Because a ‘common standard’ promotes price competition, a firm’s use of it signals that it offers value for money, validating the heuristic. This allows an equilibrium in which firms use common standards and set competitive prices.
Keywords: common standard, spurious complexity, cognitive limitations
JEL Classification: D83, L13, L51
Suggested Citation: Suggested Citation