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

32 Pages Posted: 5 Nov 2014 Last revised: 16 Dec 2014

See all articles by Paolo Crosetto

Paolo Crosetto

Grenoble Applied Economics Laboratory

Alexia Gaudeul

Joint Research Center of the European Commission

Date Written: December 15, 2014

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

Suggested Citation

Crosetto, Paolo and Gaudeul, Alexia, Choosing Whether to Compete: Price and Format Competition with Consumer Confusion (December 15, 2014). Available at SSRN: https://ssrn.com/abstract=2519000 or http://dx.doi.org/10.2139/ssrn.2519000

Paolo Crosetto

Grenoble Applied Economics Laboratory ( email )

BP 47
38040 Grenoble
France

Alexia Gaudeul (Contact Author)

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
Brussels, B-1049
Belgium

HOME PAGE: http://https://knowledge4policy.ec.europa.eu/behavioural-insights/about_en

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