Preferences, Confusion and Competition

University of Zurich, Department of Economics, Working Paper No. 344

74 Pages Posted: 2 Jun 2020

See all articles by Andreas Hefti

Andreas Hefti

University of Zurich - Department of Economics; Zurich University of Applied Sciences

Shuo Liu

Peking University - Guanghua School of Management

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: April 30, 2020

Abstract

Do firms seek to make the market transparent,or do they confuse the consumers in their product perceptions? We show that the answer to this question depends decisively on preference heterogeneity. Contrary to the well-studied case of homogeneous goods, confusion is not necessarily an equilibrium in markets with differentiated goods. In particular, if the taste distribution is polarized, so that indifferent consumers are relatively rare, firms strive to fully educate consumers. By contrast, if the taste distribution features a concentration of indecisive consumers, confusion becomes part of the equilibrium strategies. The adverse welfare consequences of confusion can be more severe than with homogeneous goods, as consumers may not only pay higher prices, but also choose a dominated option, or inefficiently refrain from buying. Qualitatively similar insights obtain for political contests, in which candidates compete for voters with heterogeneous preferences.

Keywords: Obfuscation, consumerconfusion, differentiated products, price competition, polarized/indecisive preferences, political competition

JEL Classification: D43, L13, M30

Suggested Citation

Hefti, Andreas M. and Liu, Shuo and Schmutzler, Armin, Preferences, Confusion and Competition (April 30, 2020). University of Zurich, Department of Economics, Working Paper No. 344, Available at SSRN: https://ssrn.com/abstract=3592445 or http://dx.doi.org/10.2139/ssrn.3592445

Andreas M. Hefti (Contact Author)

University of Zurich - Department of Economics ( email )

Zürich
Switzerland

Zurich University of Applied Sciences ( email )

Institut fuer Angewandte Medienwissenschaft
Zur Kesselschmiede 35
Winterthur, CH 8401
Switzerland

Shuo Liu

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Armin Schmutzler

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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