Obfuscation and Rational Inattention in Digitalized Markets

37 Pages Posted: 5 Feb 2021 Last revised: 15 Jul 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: July 15, 2021

Abstract

We study the behavior of duopolistic firms that can obfuscate their prices before competing on price. Obfuscation affects the rational inattentive consumers’ optimal information strategy, which determines the probabilistic demand. Our model advances related models by allowing consumers to update their unrestricted prior beliefs with an informative signal of any form. We show that the game may result in an obfuscation equilibrium with high prices or a transparency equilibrium with low prices and no obfuscation, providing an argument for market regulation. Obfuscation equilibria cease to exist for low information costs and if one firm seems a priori considerably more attractive.

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 (July 15, 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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