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Price Transparency and Consumer Naivety in a Competitive Market

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  • Luke Garrod

    () (Centre for Competition Policy, University of East Anglia)

Abstract

Despite intense price competition firms obfuscate product information when it is relatively costless to reveal, contrary to neoclassical predictions. This paper considers whether firms can profitably conceal (part of) their prices for a homogeneous product when consumers differ in their ability to form expectations of market prices. The model shows that the ability to conceal prices but still attract naïve consumers dampens competition and allows prices to be set above marginal cost. This suggests that the European Commission was correct to pass regulations that require airlines to set prices inclusive of taxes, fees and charges, because alternative policies of educating a proportion of naïve consumers to become sophisticated or assisting consumers to search the market more effectively could increase prices in some situations.

Suggested Citation

  • Luke Garrod, 2008. "Price Transparency and Consumer Naivety in a Competitive Market," Working Papers 07-10, Centre for Competition Policy, University of East Anglia.
  • Handle: RePEc:ccp:wpaper:wp07-10
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    File URL: http://www.ccp.uea.ac.uk/publicfiles/workingpapers/CCP07-10.pdf
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    Cited by:

    1. Wilson, Chris M., 2010. "Ordered search and equilibrium obfuscation," International Journal of Industrial Organization, Elsevier, vol. 28(5), pages 496-506, September.
    2. Bogumił Kamiński & Maciej Łatek, 2016. "On asymmetric Bertrand duopoly with price uncertainty," International Journal of Economic Theory, The International Society for Economic Theory, vol. 12(4), pages 303-316, December.
    3. Joel Slemrod, 2010. "Old George Orwell Got It Backward: Some Thoughts on Behavioral Tax Economics," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 66(1), pages 15-33, March.
    4. Chris M. Wilson, 2008. "Ordered Search and Equilibrium Obfuscation," Economics Series Working Papers 401, University of Oxford, Department of Economics.
    5. Kaminski, Bogumil & Latek, Maciej, 2012. "A Simple Model of Bertrand Duopoly with Noisy Prices," MPRA Paper 41333, University Library of Munich, Germany.

    More about this item

    Keywords

    bounded rationality; obfuscation; price transparency;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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