Choosing Whether to Compete: Price and Format Competition with Consumer Confusion

Abstract

We run a market experiment where firms can choose not only their price but also whether to present comparable offers. They are faced with artificial demand from consumers who make mistakes when assessing the net value of products on the market. If some offers are comparable however, some savvy consumers favor the best of the comparable offers vs. non-comparable offers. We vary the number of such consumers as well as the strength of their preferences for the best of the comparable offers. In treatments where firms observe the past decisions of their competitors, having more savvy consumers leads firms not to present comparable offers. The result is higher prices and lower welfare for all consumers. In treatments where firms cannot monitor the competition, having more savvy consumers leads firms to present comparable offers. This results in lower prices and improved welfare for all consumers.

Keywords: tacit collusion, obfuscation, price comparison, shrouding, spurious differentiation, standardization, transparency

JEL Classification: C92, D18, D43, L13, L15, L51, M31