Price Complexity and Buyer Confusion in Markets
32 Pages Posted: 14 Oct 2011
Date Written: October 4, 2011
This paper reports an experiment that examines the effects of price complexity on market prices. In my experimental posted-offer markets, each seller offers an identical good to buyers with homogeneous preferences. First, sellers simultaneously decide on the price and the tariff structure of their good, then buyers make their choices among the goods. Each seller can choose to have a one, two or three-part tariff. The tariff structure affects neither the value nor the price of the good. However, having a higher number of tariffs makes it harder for buyers to calculate the price of the good. Main results show that high priced sellers choose high complexity more often than low priced sellers in case buyers are simulated in accordance with the bounded rationality model of Carlin (2009). However, the evidence for this effect is weaker in case the buyers are human subjects. Importantly, prices are higher when the sellers can confuse buyers using price complexity than when the sellers interact with perfectly rational robot buyers.
Keywords: experiment, bounded rationality, buyer confusion, price complexity, market power
JEL Classification: C9, D03, D12, L13
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