Endogenous Market Transparency and Price Competition

19 Pages Posted: 9 Nov 2009 Last revised: 27 Nov 2009

Klaus Kultti

University of Helsinki - Department of Political and Economic Studies

Mikko Leppämäki

Aalto University

Eeva Mauring

University of Helsinki - Department of Economics

Date Written: November 4, 2009

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

Suggested Citation

Kultti, Klaus and Leppämäki, Mikko and Mauring, Eeva, Endogenous Market Transparency and Price Competition (November 4, 2009). Available at SSRN: https://ssrn.com/abstract=1499611 or http://dx.doi.org/10.2139/ssrn.1499611

Klaus Kultti

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 17
FIN-00014 Helsinki
Finland

Mikko Leppämäki (Contact Author)

Aalto University ( email )

Graduate School of Finance (GSF)
P.O. Box 21220 (Runeberginkatu 22-24)
Helsinki, Aalto 00076
Finland
+358-9-470-38967 (Phone)
+358-9-470-38678 (Fax)

HOME PAGE: http://gsf.aalto.fi/html_people/gsf_mikko.html

Eeva Mauring

University of Helsinki - Department of Economics ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

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