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Curbing obfuscation: Empower consumers or regulate firms?

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  • Gu, Yiquan
  • Wenzel, Tobias

Abstract

This paper develops a market model where consumers refrain from buying products that they are unable to understand and a firm can influence the probability of a consumer understanding its offer. In equilibrium, firms artificially increase product complexity, and firms that offer more transparent products choose on average higher prices. We study two sets of public policies. We show that consumer side policies may have the unintended consequence of encouraging obfuscation while firm side policies are always effective in curbing obfuscation. Interestingly, a consumer side policy can even harm consumers when it protects consumers so much that it greatly increases the marginal effectiveness of obfuscation. Policies on both sides can either increase or decrease social welfare depending on the marginal effectiveness and the marginal cost of obfuscation. Our main insights hold in both asymmetric and symmetric obfuscation equilibria.

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  • Gu, Yiquan & Wenzel, Tobias, 2020. "Curbing obfuscation: Empower consumers or regulate firms?," International Journal of Industrial Organization, Elsevier, vol. 70(C).
  • Handle: RePEc:eee:indorg:v:70:y:2020:i:c:s0167718720300047
    DOI: 10.1016/j.ijindorg.2020.102582
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    Cited by:

    1. Rasch, Alexander & Thöne, Miriam & Wenzel, Tobias, 2020. "Drip pricing and its regulation: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 353-370.

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    More about this item

    Keywords

    Consumer confusion; Obfuscation; Consumer protection policy; Regulation;
    All these keywords.

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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