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Spurious complexity and common standards in markets for consumer goods

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  • Alexia Gaudeul

    (Jena Graduate School, Friedrich Schiller University Jena)

  • Robert Sugden

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

Abstract

It has been argued that cognitively constrained consumers respond sub-optimally to complex decision problems, and that firms can exploit these limitations by introducing spurious complexity into tariff structures, weakening price competition. We model a countervailing force. Restricting one's choices to the most easily comparable options is a psychologically well-attested heuristic. Consumers who use this heuristic favour firms that follow common conventions about tariff structures. Because a 'common standard' promotes price competition, a firm's use of it signals that it offers value for money, validating the heuristic. This allows an equilibrium in which firms use common standards and set competitive prices.

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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2009-084.

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Date of creation: 15 Oct 2009
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Handle: RePEc:jrp:jrpwrp:2009-084

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Keywords: common standard; spurious complexity; cognitive limitations;

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  1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  2. Glenn Ellison, 2005. "A Model of Add-on Pricing," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 585-637, May.
  3. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  4. Cass R. Sunstein & Richard H. Thaler, 2003. "Libertarian paternalism is not an oxymoron," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 48(Jun).
  5. 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.
  6. repec:reg:wpaper:320 is not listed on IDEAS
  7. 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.
  8. Spiegler, Ran, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 1(2), pages 207-231, June.
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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.
  3. Crosetto, P. & Gaudeul, A., 2014. "Testing the strength and robustness of the attraction effect in consumer decision making," Working Papers 2014-04, Grenoble Applied Economics Laboratory (GAEL).

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