Consumer confusion, obfuscation, and price regulation

This paper studies firms’ obfuscation choices in a duopoly setting where two firms differ in their marginal costs of production. We show that the high-cost firm chooses maximum obfuscation while the lowcost firmchooses minimal (maximal) obfuscation if the cost advantage is large (small). We argue that price regulation might be a useful policy in such an environment for two reasons: Introducing a price cap benefits consumers as it i) makes pricing more competitive and ii) reduces firms’ incentives to obfuscate. Moreover, a price cap benefits social welfare as it shifts production to the more efficient low-cost firm.