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Dynamic competition in deceptive markets

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  • JOHNEN, Johannes

    () (CORE, Université catholique de Louvain)

Abstract

In many deceptive markets, firms design contracts to exploit mistakes of naive consumers. These contracts also attract less profitable sophisticated consumers. I study such markets when firms compete repeatedly and gather usage data about their customers which is informative about the likelihood of a customer being sophisticated. I show in a benchmark model that firms do not benefit from private information in this setting when all consumers are rational. I find that in sharp contrast to a model with only rational consumers, this customer information mitigates competition and is of great value to its owner despite intense competition. I discuss several implications of the value of customer information on naiveté. Private information on customers’ sophistication induces profits that are bell-shaped in the share of naive consumers. Firms prefer an even mix of both customer types. I also show that if firms can educate (some) naives about hidden fees, competition is already mitigated when firms compete for customers with initially symmetric information. I analyze a policy that discloses customer information to all firms and thereby increases consumer surplus. I discuss how the UK governments’ midata program might induce crucial aspects of this policy, and illustrate the obustness of results through several extensions.

Suggested Citation

  • JOHNEN, Johannes, 2017. "Dynamic competition in deceptive markets," CORE Discussion Papers 2017036, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2017036
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    More about this item

    Keywords

    Consumer mistakes; deceptive products; shrouded attributes; big data; targeted pricing; consumer data; add-on pricing; price discrimination; industry dynamics;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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