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Spurious Complexity and Common Standards in Markets for Consumer Goods

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  • Alexia Gaudeul

    ()
    (School of Economics and Centre for Competition Policy, University of East Anglia)

  • Robert Sugden

    ()
    (School of Economics and Centre for Competition Policy, University of East Anglia)

Abstract

Behavioural and industrial economists have argued that, because of cognitive limitations, consumers are liable to make sub-optimal choices in complex decision problems. Firms can exploit these limitations by introducing spurious complexity into tariff structures, weakening price competition. This paper models a countervailing force. Consumers’ choice problems are simplified if competing firms follow common conventions about tariff structures. Because such a ‘common standard’ promotes price competition, a firm’s use of it signals that its products offer value for money. If consumers recognize this effect, there can be a stable equilibrium in which firms use common standards and set competitive prices.

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File URL: http://www.ccp.uea.ac.uk/publicfiles/workingpapers/CCP07-20.pdf
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Bibliographic Info

Paper provided by Centre for Competition Policy, University of East Anglia in its series Working Papers with number 07-20.

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Length: 36 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:ccp:wpaper:wp07-20

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Related research

Keywords: decision-making; naïve consumers; savvy consumers; price competition; common standard effect; cognitive limitations.;

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References

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  1. Chris Wilson & Catherine Waddams Price, 2007. "Do Consumers Switch to the Best Supplier?," Working Papers 07-6, Centre for Competition Policy, University of East Anglia.
  2. Spiegler, Ran, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 1(2), pages 207-231, June.
  3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  4. Glenn Ellison, 2003. "A Model of Add-on Pricing," NBER Working Papers 9721, National Bureau of Economic Research, Inc.
  5. Cass R. Sunstein & Richard H. Thaler, 2003. "Libertarian paternalism is not an oxymoron," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 48(Jun).
  6. Gabaix, Xavier & Laibson, David I., 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
  7. Robert Sugden, 2004. "The Opportunity Criterion: Consumer Sovereignty Without the Assumption of Coherent Preferences," American Economic Review, American Economic Association, vol. 94(4), pages 1014-1033, September.
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Cited by:
  1. Paolo Crosetto & Alexia Gaudeul, 2011. "Do consumers prefer offers that are easy to compare? An experimental investigation," Jena Economic Research Papers 2011-044, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  2. Ioanna Chioveanu & Jidong Zhou, 2011. "Price Competition with Consumer Confusion," Working Papers 11-19, New York University, Leonard N. Stern School of Business, Department of Economics.

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