Chioveanu, Ioana and Zhou, Jidong (2009): Price Competition and Consumer Confusion.
Download (510kB) | Preview
This paper proposes a model in which identical sellers of a homogenous product compete in both prices and price frames (i.e., ways to present price information). We model price framing by assuming that firms’ frame choices affect the comparability of their price offers: consumers may fail to compare prices due to frame differentiation, and due to frame complexity. In the symmetric equilibrium the firms randomize over both price frames and prices, and make positive profits. This result is consistent with the observed coexistence of price and price frame dispersion in the market. We also show that (i) the nature of equilibrium depends on which source of consumer confusion dominates, and (ii) an increase in the number of firms can increase industry profits and harm consumers.
|Item Type:||MPRA Paper|
|Original Title:||Price Competition and Consumer Confusion|
|Keywords:||bounded rationality, framing, frame dispersion, incomplete preferences, price competition, price dispersion|
|Subjects:||L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets
D - Microeconomics > D4 - Market Structure and Pricing > D43 - Oligopoly and Other Forms of Market Imperfection
|Depositing User:||Jidong Zhou|
|Date Deposited:||16. Sep 2009 19:51|
|Last Modified:||12. Feb 2013 21:06|
Armstrong, M., and Y. Chen (2009): “Inattentive Consumers and Product Quality,” Journal of European Economic Association, 7(2-3), 411—422.
Aumann, R. (1962): “Utility Theory Without the Completeness Axiom,” Econometrica, 30(3), 445—462.
Baye, M., D. Kovenock, and C. de Vries (1992): “It Takes Two to Tango: Equilibria in a Model of Sales,” Games and Economic Behavior, 4(4), 493—510.
Baye, M., J. Morgan, and P. Scholten (2006): “Information, Search, and Price Dispersion,” in Handbook of Economics and Information Systems, ed. by T. Hendershott. Elsevier Press, Amsterdam.
Bertrand, M., D. Karlan, S. Mullainathan, E. Shafir, and J. Zinman (2005): “What’s Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment,” Quarterly Journal of Economics, forthcoming.
Carlin, B. (2009): “Strategic Price Complexity in Retail FinancialMarkets,” Journal of Financial Economics, 91(3), 278—287.
Choi, J., D. Laibson, and B. Madarian (2008): “Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds,” mimeo, Harvard.
Eliaz, K., and E. Ok (2006): “Indifference or Indecisiveness? Choice-Theoretic Foundations of Incomplete Preferences,” Games and Economic Behavior, 56, 61—86.
Ellison, G. (2006): “Bounded Rationality in Industrial Organization,” in Advances in Economics and Econometrics: Theory and Applications: Ninth World Congress of the Econometric Society, ed. by R. Blundell, W. Newey, and T. Persson. Cambridge University Press, Cambridge, UK.
Ellison, G., and S. Ellison (2008): “Search, Obfuscation, and Price Elasticities on the Internet,” Econometrica, forthcoming.
Ellison, G., and A. Wolitzky (2008): “A Search Cost Model of Obfuscation,” mimeo, MIT.
Estelami, H. (1997): “Consumer Perceptions of Multi-Dimensional Prices,” in Advances in Consumer Research, ed. byM. Brucks, and D. Maclnnis, pp. 392—399.
Hortaçsu, A., and C. Syverson (2004): “Product Differentiation, Search Costs, and Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds,” Quarterly Journal of Economics, 119(2), 403—456.
Morwitz, V., E. Greenleaf, and E. Johnson (1998): “Divide and Prosper:Consumers’ Reaction to Partitioned Prices,” Journal of Marketing Research, 35(4),453—463.
Piccione, M., and R. Spiegler (2009): “Framing Competition,” mimeo, LSE and UCL.
Spiegler, R. (2006): “Competition over Agents with Boundedly Rational Expectations,” Theoretical Economics, 1(2), 207—231.
Stahl, D. (1989): “Oligopolistic Pricing with Sequential Consumer Search,” American Economic Review, 79(4), 700—712.
Thomas, M., and V. Morwitz (2009): “The Ease of Computation Effect: The Interplay of Metacognitive Experiences and Naive Theories in Judgments of Price Differences,” Journal of Marketing Research, 46(1), 81—91.
Tversky, A., and D. Kahneman (1981): “The Framing of Decisions and the Psychology of Choice,” Science, 211, 453—458.
Varian, H. (1980): “A Model of Sales,” American Economic Review, 70(4), 651—659.
Wilson, C. (2008): “Ordered Search and Equilibrium Obfuscation,” mimeo, Oxford.
Woodward, S. (2003): “Consumer Confusion in the Mortgage Market,” mimeo.