Preferences, Confusion and Competition

76 Pages Posted: 8 May 2020

See all articles by Andreas Hefti

Andreas Hefti

University of Zurich

Shuo Liu

Peking University - Guanghua School of Management

Armin Schmutzler

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

Date Written: May 2020

Abstract

Do firms seek to make the market transparent, or do they confuse 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: consumer confusion, differentiated products, obfuscation, polarized/indecisive preferences, Political Competition, price competition

JEL Classification: D43, L13, M30

Suggested Citation

Hefti, Andreas and Liu, Shuo and Schmutzler, Armin, Preferences, Confusion and Competition (May 2020). CEPR Discussion Paper No. DP14700. Available at SSRN: https://ssrn.com/abstract=3594335

Andreas Hefti (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
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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