Choosing Not to Compete: Can Firms Maintain High Prices by Confusing Consumers?

26 Pages Posted: 2 Nov 2017

See all articles by Paolo Crosetto

Paolo Crosetto

Grenoble Applied Economics Laboratory

Alexia Gaudeul

Georg-August-Universität Göttingen

Date Written: Winter 2017

Abstract

Firms with very similar products often present their products in different ways. This makes it difficult for consumers to find out which product fits their needs best, or which one is the cheapest. Why is there no convergence toward common ways to present products? Is it possible for firms to maintain high prices by confusing consumers? We run a market experiment to investigate those questions. In our market, firms choose how to present their products in addition to choosing their price. We find that firms maintain different ways to present their products and that this allows them to maintain high prices. This behavior is not consistent with competitive behavior, such as when firms adopt best responses to each other, imitate the most successful firm, or learn the best strategy over time. Rather, our results are only consistent with cooperation between firms. Firms cooperate by not imitating the way other firms present their products. Cooperation is maintained by the threat of tough competition if a firm makes its product easy to compare with others. Firms are all the more likely to maintain such cooperation if their products do not actually differ much. This is because in that case, maintaining differences in the presentation of their products is the only way to maintain profits.

Suggested Citation

Crosetto, Paolo and Gaudeul, Alexia, Choosing Not to Compete: Can Firms Maintain High Prices by Confusing Consumers? (Winter 2017). Journal of Economics & Management Strategy, Vol. 26, Issue 4, pp. 897-922, 2017. Available at SSRN: https://ssrn.com/abstract=3063676 or http://dx.doi.org/10.1111/jems.12212

Paolo Crosetto (Contact Author)

Grenoble Applied Economics Laboratory ( email )

BP 47
38040 Grenoble
France

Alexia Gaudeul

Georg-August-Universität Göttingen ( email )

Platz der Goettinger Sieben 3
Goettingen, 37073
Germany
+49 (0) 551 39 7333 (Phone)

HOME PAGE: http://agaudeul.free.fr

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