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Choosing whether to compete: Price and format competition with consumer confusion

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  • Paolo Crosetto

    () (GAEL, Universite de Grenoble)

  • Alexia Gaudeul

    () (DFG RTG 1411, EIC, Friedrich-Schiller-Universität Jena)

Abstract

We run a market experiment where firms can choose not only their price but also whether to present comparable offers. They are faced with artificial demand from consumers who make mistakes when assessing the net value of products on the market. If some offers are comparable however, some consumers favor the best of the comparable offers vs. non-comparable offers. We vary the number of such consumers as well as the strength of their preferences for the best of the comparable offers. In treatments where firms observe the past decisions of their competitors, firms learn not to present comparable offers especially when many consumers prefer comparable offers. This occurs after initial periods with strong competition and leads to lower welfare for all consumers. In treatments where firms cannot monitor the competition, firms end up having to present comparable offers, which leads to an improvement in welfare for all consumers.

Suggested Citation

  • Paolo Crosetto & Alexia Gaudeul, 2014. "Choosing whether to compete: Price and format competition with consumer confusion," Jena Economic Research Papers 2014-026, Friedrich-Schiller-University Jena.
  • Handle: RePEc:jrp:jrpwrp:2014-026
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    Cited by:

    1. Gu, Yiquan & Wenzel, Tobias, 2015. "Putting on a tight leash and levelling playing field: An experiment in strategic obfuscation and consumer protection," International Journal of Industrial Organization, Elsevier, vol. 42(C), pages 120-128.
    2. Möllers, Claudia & Stühmeier, Torben & Wenzel, Tobias, 2016. "Search costs in concentrated markets: An experimental analysis," DICE Discussion Papers 233, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    3. Mark Armstrong, 2015. "Search and Ripoff Externalities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 273-302, November.
    4. Rasch, Alexander & Thöne, Miriam & Wenzel, Tobias, 2018. "Drip pricing and its regulation: Experimental evidence," DICE Discussion Papers 297, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

    More about this item

    Keywords

    asymmetric dominance; attraction effect; collusion; competition; confusopoly; experiment; framing; industrial organization; obfuscation; oligopoly; price comparison; shrouding; spurious complexity; standardization; transparency;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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