Price Competition under Limited Comparability

Piccione, Michele and Spiegler, Ran (2009): Price Competition under Limited Comparability.

Abstract

This paper studies market competition when firms can influence consumers' ability to compare market alternatives, through their choice of price "formats". We introduce random graphs as a tool for modelling limited comparability of formats. Our main results concern the interaction between firms' equilibrium price and format decisions and its implications for industry profits and consumer switching rates. We show that narrow regulatory interventions that aim to facilitate comparisons may have adverse consequences for consumer welfare. Finally, we argue that our limited-comparability approach provides a new perspective into the phenomenon of product differentiation.

• Item Type: MPRA Paper
• Language: English
• Keywords: price competition, industrial organization, limited comparability, bounded rationality, framing, consumer protection, product differentiation, complexity
• Subjects: D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D1 - Household Behavior and Family Economics > D18 - Consumer Protection; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C79 - Other; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection

References

Anderson, S., A. de Palma and J.F. Thisse (1992): Discrete Choice Theory of Product Differentiation, MIT Press.

Carlin, B. (2008): "Strategic Price Complexity in Retail Financial Markets," Journal of Financial Economics, forthcoming.

Chioveanu, I. and J. Zhou (2009): "Price Competition with Strategic Obfuscation", UCL-ELSE Working Paper no. 339/2009.

EC (2009): "On the Follow up in Retail Financial Services to the Consumer Market Scoreboard," Commission Staff Working Document, http://ec.europa.eu/consumers/rights/docs/swd_retail_fin_services_en.pdf.

Ellison, G. and A. Wolitzky (2008): "A Search Cost Model of Obfuscation", mimeo. MIT.

Eliaz, K. and R. Spiegler (2007): "Consideration Sets and Competitive Marketing," mimeo, UCL and Brown University.

Eliaz, K. and R. Spiegler (2008): "Consumer Optimism and Price Discrimination," Theoretical Economics 3, 459-497.

Gabaix, X. and D. Laibson (2006): "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Quarterly Journal of Economics 121, 505-540.

Iyengar, S. and M. Lepper (2000): "When Choice is Demotivating: Can One Desire Too Much of a Good Thing?" Journal of Personality and Social Psychology 79, 995-1006.

Iyengar, S., G. Huberman and W. Jiang (2004): "How Much Choice is Too Much: Determinants of Individual Contributions in 401K Retirement Plans," in O.S. Mitchell and S. Utkus (Eds.), Pension Design and Structure: New Lessons from Behavioral Finance (pp. 83-95). Oxford: Oxford University Press.

OFT (2008): "Personal Current Accounts in the UK", an OFT market study, http://www.oft.gov.uk/shared_oft/reports/financial_products/OFT1005.pdf.

Piccione, M. and A. Rubinstein (2003): "Modeling the Economic Interaction of Agents with Diverse Abilities to Recognize Equilibrium Patterns," Journal of European Economic Association 1, 212-223.

Rubinstein, A. (1993): "On Price Recognition and Computational Complexity in a Monopolistic Model," Journal of Political Economy 101, 473-484.

Rubinstein, A. and Y. Salant (2008): "(A,f): Choices with Frames," Review of Economic Studies.75, 1287-1296.

Spiegler, R. (2006): "The Market for Quacks," Review of Economic Studies 73, 1113-1131.

Spiegler R. (2006): "Competition over Agents with Boundedly Rational Expectations," Theoretical Economics 1, 207-231.

Varian, H. (1980): "A Model of Sales," American Economic Review 70, 651-59.

Wilson, C. (2008): "Ordered Search and Equilibrium Obfuscation," mimeo, University of Oxford.