Obfuscation and Rational Inattention in Digitalized Markets

35 Pages Posted: 5 Feb 2021

See all articles by Aljoscha Janssen

Aljoscha Janssen

Singapore Management University; Research Institute of Industrial Economics (IFN)

Johannes Kasinger

Goethe University Frankfurt; Leibniz Institute for Financial Research SAFE

Date Written: February 4, 2021

Abstract

This paper studies the behavior of competing firms in a duopoly with rational inattentive consumers. Firms play a sequential game in which they decide to obfuscate their individual prices before competing on price. Probabilistic demand functions are endogenously determined by the consumers’ optimal information strategy, which depends on the firms’ obfuscation choice and the consumers’ unrestricted prior beliefs. We show that the game may result in an obfuscation equilibrium with high prices where both firms obfuscate and a transparency equilibrium with low prices and no obfuscation, providing an argument for market regulation. Lower information costs and asymmetric prior beliefs about prices reduce the probability of an obfuscation equilibrium. Using data on Sweden, we document a decrease in price complexity and corresponding prices in the market for mobile phone subscriptions in the last two decades. Our model rationalizes these changes and explains why complexity and high prices persist in some but not all digitalized markets.

Keywords: Rational Inattention, Obfuscation, Price Competition, Digitalized Markets

JEL Classification: D11, D21, D43

Suggested Citation

Janssen, Aljoscha and Kasinger, Johannes, Obfuscation and Rational Inattention in Digitalized Markets (February 4, 2021). SAFE Working Paper No. 306, Available at SSRN: https://ssrn.com/abstract=3779853 or http://dx.doi.org/10.2139/ssrn.3779853

Aljoscha Janssen

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Johannes Kasinger (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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