Buyer Confusion and Market Prices
28 Pages Posted: 7 Apr 2011
Date Written: June 8, 2010
We employ a price setting duopoly experiment to examine whether buyer confusion increases market prices. Each seller offers a good to buyers who have homogeneous preferences. Sellers decide on the number of attributes of their good and set prices. The number of attributes bears no cost to the sellers and does not affect the value of the good to the buyers but adds complexity to buyers' evaluation of the goods. The experimental results indicate that the buyers make more suboptimal choices and that prices are higher when the number of attributes of the goods is higher. Moreover, prices and profits are higher than those in a benchmark treatment with perfectly rational (robot) buyers.
Keywords: experiment, bounded rationality, buyer confusion, product complexity, market power
JEL Classification: C9, D03, D12, L13
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