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Obfuscation in competitive markets


Fehr, Ernst; Wu, Keyu (2023). Obfuscation in competitive markets. Working paper series / Department of Economics 391, University of Zurich.

Abstract

In many markets, firms make their products complex through add-on features, thus making them difficult to evaluate and compare. Does this product obfuscation lure buyers into buying overpriced products, and if so, why does competition not eliminate this practice? More generally, under which conditions can sellers enforce stable obfuscation levels in a competitive environment such that they can increase their profits at the buyers’ expense? We show – based on competitive experimental markets – that add-ons that merely complicate the products render obfuscation quite fragile because buyers display an aversion against complex products. However, if add-ons are surplus-enhancing, sellers can mitigate competition via obfuscation which generates substantial profits and persistent dispersion in headline and add-on prices. Sellers anticipate that obfuscation limits the buyers’ depth and breadth of search, and they exploit this by hiding unattractive product features. Therefore, even the best product in the market is priced above marginal cost and buyers persistently fail to find the best product in the market such that inferior products have a good chance of being traded. We also identify the causal impact of obfuscation opportunities on profits and price dispersion because if we remove obfuscation opportunities, overall prices quickly converge to marginal cost. Thus, surplus-enhancing obfuscation opportunities cause persistent price dispersion, facilitate stable profits and reduce buyers’ share of the surplus.

Abstract

In many markets, firms make their products complex through add-on features, thus making them difficult to evaluate and compare. Does this product obfuscation lure buyers into buying overpriced products, and if so, why does competition not eliminate this practice? More generally, under which conditions can sellers enforce stable obfuscation levels in a competitive environment such that they can increase their profits at the buyers’ expense? We show – based on competitive experimental markets – that add-ons that merely complicate the products render obfuscation quite fragile because buyers display an aversion against complex products. However, if add-ons are surplus-enhancing, sellers can mitigate competition via obfuscation which generates substantial profits and persistent dispersion in headline and add-on prices. Sellers anticipate that obfuscation limits the buyers’ depth and breadth of search, and they exploit this by hiding unattractive product features. Therefore, even the best product in the market is priced above marginal cost and buyers persistently fail to find the best product in the market such that inferior products have a good chance of being traded. We also identify the causal impact of obfuscation opportunities on profits and price dispersion because if we remove obfuscation opportunities, overall prices quickly converge to marginal cost. Thus, surplus-enhancing obfuscation opportunities cause persistent price dispersion, facilitate stable profits and reduce buyers’ share of the surplus.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:February 2023
Deposited On:10 Jun 2021 12:54
Last Modified:06 Mar 2024 14:35
Series Name:Working paper series / Department of Economics
Number of Pages:51
ISSN:1664-7041
Additional Information:Revised version
OA Status:Green
Other Identification Number:merlin-id:21125
  • Content: Published Version
  • Permission: Download for registered users
  • Description: Version June 2021
  • Content: Updated Version
  • Description: Revised version February 2023