Endogenous Market Transparency and Price Competition

Abstract

We introduce a model of price competition with endogenous market transparency, where it is costly for consumers to get informed about the announced prices. We show that there is symmetric mixed strategy equilibrium with a monotonic relationship between the degree of transparency and intensity of competition. Interestingly, we find that there are multiple equilibria with zero, low and high levels of market transparency with the high level of market transparency being the stable equilibrium. Once comparing the stable equilibrium with the welfare maximizing one we find that the private market solution entails excessive investments in information acquisition. That is, at high levels of transparency the gain of consumers from increased transparency is smaller than the loss in the firms’ profits leading to decrease in total welfare.

Keywords: endogenous market transparency, price competition, mixed strategy, multiple equilibria, welfare

JEL Classification: D43, L13, L15