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Price Competition with Consumer Confusion

Author

Listed:
  • Ioana Chioveanu

    () (Department of Economics and Finance, Brunel University, Uxbridge, Middlesex UB8 3PH, United Kingdom)

  • Jidong Zhou

    () (Department of Economics, Stern School of Business, New York University, New York, New York 10012)

Abstract

This paper proposes a model in which identical sellers of a homogeneous product compete in both prices and price frames (i.e., ways to present price information). Frame choices affect the comparability of price offers and may cause consumer confusion and lower price sensitivity. In equilibrium, firms randomize their frame choices to obfuscate price comparisons and sustain positive profits. The nature of the equilibrium depends on whether frame differentiation or frame complexity is more confusing. Moreover, an increase in the number of competitors induces firms to rely more on frame complexity, and this may boost industry profits and lower consumer surplus. This paper was accepted by J. Miguel Villas-Boas, marketing.

Suggested Citation

  • Ioana Chioveanu & Jidong Zhou, 2013. "Price Competition with Consumer Confusion," Management Science, INFORMS, vol. 59(11), pages 2450-2469, November.
  • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:11:p:2450-2469
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    File URL: http://dx.doi.org/10.1287/mnsc.2013.1716
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    References listed on IDEAS

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