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Price Competition Under Limited Comparability

  • Michele Piccione
  • Ran Spiegler

This article studies market competition when firms can influence consumers' ability to compare market alternatives through their choice of price "formats." In our model, the ability of a consumer to make a comparison depends on the firms' format choices. Our main results concern the interaction between firms' equilibrium price and format decisions and its implications for industry profits and consumer switching rates. In particular, market forces drive down the firms' profits to a "constrained competitive" benchmark if and only if the comparability structure satisfies a property that we interpret as a form of "frame neutrality." The same property is necessary for equilibrium behavior to display statistical independence between price and format decisions. We also show that narrow regulatory interventions that aim to facilitate comparisons may have an anticompetitive effect. Copyright 2012, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/qje/qjr053
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Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

Volume (Year): 127 (2012)
Issue (Month): 1 ()
Pages: 97-135

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Handle: RePEc:oup:qjecon:v:127:y:2012:i:1:p:97-135
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  1. Michele Piccione & Ariel Rubinstein, 2010. "Modeling the Economic Interaction of Agents with Diverse Abilities to Recognize Equilibrium Patterns," Levine's Working Paper Archive 506439000000000108, David K. Levine.
  2. Ran Spiegler, 2005. "Competition over Agents with Boundedly Rational Expectations," Levine's Bibliography 122247000000000535, UCLA Department of Economics.
  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. Eliaz, Kfir & Spiegler, Ran, 2006. "Consideration Sets and Competitive Marketing," MPRA Paper 21434, University Library of Munich, Germany, revised 03 Sep 2009.
  5. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  6. Eliaz, Kfir & Spiegler, Ran, 2008. "Consumer optimism and price discrimination," Theoretical Economics, Econometric Society, vol. 3(4), December.
  7. Wilson, Chris M., 2010. "Ordered search and equilibrium obfuscation," International Journal of Industrial Organization, Elsevier, vol. 28(5), pages 496-506, September.
  8. Rani Spiegler, 2005. "The Market for Quacks," Levine's Bibliography 784828000000000634, UCLA Department of Economics.
  9. Rubenstein, A., 1991. "On Price Recognition and Computational Complexity in a Monopolistic Model," Papers 35-91, Tel Aviv.
  10. Glenn Ellison & Alexander Wolitzky, 2009. "A Search Cost Model of Obfuscation," NBER Working Papers 15237, National Bureau of Economic Research, Inc.
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