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Choice Complexity and Market Competition

Author

Listed:
  • Ran Spiegler

    (School of Economics, Tel Aviv University, Tel Aviv 6997801, Israel
    Department of Economics, University College London, London WC1E 6BT, United Kingdom
    Centre for Macroeconomics, London WC2A 2AE, United Kingdom)

Abstract

Consumers often find it hard to make correct value comparisons between market alternatives. Part of this choice complexity is the result of deliberate obfuscation by firms. This review synthesizes a theoretical literature that analyzes the role of choice complexity in otherwise competitive markets. I identify two general classes of market models in the literature: (a) The obfuscation strategy of firms is an independent framing device that affects the probability with which consumers make correct comparisons, and (b) market alternatives are multiattribute objects, and obfuscation is captured by lopsided location in attribute space, lowering the probability of being dominated by another market alternative. I address the following key questions: What determines the amount of choice complexity in market equilibrium? What is the relation between choice complexity and payoff-relevant aspects of the market outcome? What is the role of consumer protection measures? The models surveyed in this review suggest that equilibrium obfuscation and choice complexity increase in response to intensified competition, mitigating the positive effect of competition on consumer welfare. However, equilibrium effects can also attenuate the positive welfare effects of regulatory interventions.

Suggested Citation

  • Ran Spiegler, 2016. "Choice Complexity and Market Competition," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 1-25, October.
    • Handle: RePEc:anr:reveco:v:8:y:2016:p:1-25
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    File URL: http://www.annualreviews.org/doi/10.1146/annurev-economics-070615-115216
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    Citations

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    Cited by:

    1. Vladimir Asriyan & Dana Foarta & Victoria Vanasco, 2023. "The Good, the Bad, and the Complex: Product Design with Imperfect Information," American Economic Journal: Microeconomics, American Economic Association, vol. 15(2), pages 187-226, May.
    2. Mikhalishchev, Sergei, 2023. "Optimal menu when agents make mistakes," Research in Economics, Elsevier, vol. 77(1), pages 25-33.
    3. Byrne, David P. & Martin, Leslie A., 2021. "Consumer search and income inequality," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    4. Timothy J. Richards & Gordon J. Klein & Celine Bonnet & Zohra Bouamra-Mechemache, 2020. "Strategic Obfuscation and Retail Pricing," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(4), pages 859-889, December.
    5. Chioveanu, Ioana, 2020. "A more general model of price complexity," International Journal of Industrial Organization, Elsevier, vol. 69(C).
    6. Johannes Johnen & David Ronayne, 2021. "The only Dance in Town: Unique Equilibrium in a Generalized Model of Price Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 69(3), pages 595-614, September.
    7. Bellemare, Charles & Deversi, Marvin & Englmaier, Florian, 2019. "Complexity and Distributive Fairness Interact in Affecting Compliance Behavior," Rationality and Competition Discussion Paper Series 190, CRC TRR 190 Rationality and Competition.
    8. Christos Genakos & Tobias Kretschmer & Ambre Nicolle, 2021. "Strategic confusopoly: evidence from the UK mobile market," CEP Discussion Papers dp1810, Centre for Economic Performance, LSE.
    9. Asriyan, Vladimir & Foarta, Dana & Vanasco, Victoria, 2018. "Strategic Complexity When Seeking Approval," Research Papers 3615, Stanford University, Graduate School of Business.
    10. Nicolas de Roos, 2018. "Collusion with limited product comparability," RAND Journal of Economics, RAND Corporation, vol. 49(3), pages 481-503, September.
    11. Chioveanu, Ioana, 2019. "Prominence, complexity, and pricing," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 551-582.
    12. Karpov, Aleksandr, 2017. "Price competition and limited attention," Economics Discussion Papers 2017-89, Kiel Institute for the World Economy (IfW Kiel).
    13. McGowan, Féidhlim, 2018. "The roaming regulation and the case for applying behavioural industrial organisation to EU competition policy," Papers WP598, Economic and Social Research Institute (ESRI).
    14. Janssen, Aljoscha & Kasinger, Johannes, 2021. "Obfuscation and Rational Inattention in Digitalized Markets," Working Paper Series 1379, Research Institute of Industrial Economics.
    15. Gotfredsen, Andreas & Nielsen, Carsten S. & Sebald, Alexander C. & Webb, Edward J.D., 2021. "Manipulating perception: The effect of product similarity on valuations and markets," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 263-286.
    16. Gerasimou, Georgios & Papi, Mauro, 2018. "Duopolistic competition with choice-overloaded consumers," European Economic Review, Elsevier, vol. 101(C), pages 330-353.
    17. Janssen, Aljoscha & Kasinger, Johannes, 2021. "Obfuscation and rational inattention in digitalized markets," SAFE Working Paper Series 306, Leibniz Institute for Financial Research SAFE.

    More about this item

    Keywords

    behavioral industrial organization; bounded rationality; choice complexity; competition; default bias; framing; limited comparability;
    All these keywords.

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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