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Confusopoly: competition and obfuscation in markets

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Abstract

This paper examines the effects of competition in experimental posted-offer markets where sellers can confuse buyers. I report two studies. In one, the sellers offering heterogeneous goods can obfuscate buyers by means of spurious product differentiation. In the other study, sellers offer identical goods and make their prices unnecessarily complex by having multi-part tariffs. I vary the level of competition by having treatments with two and three- sellers in both studies, and having an additional treatment with five-sellers in one study. The results show that average complexity created by a seller is not different for the treatments with two, three and five sellers. In addition, market prices are highest and buyer surplus is lowest when there are two sellers in a market.

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Notes

  1. http://www.whitehouse.gov/assets/documents/CEA_Health_Care_Report.

  2. http://www.whitehouse.gov/the_press_office/Fact-Sheet-Reforms-to-Protect-American-Credit-Card-Holders/.

  3. See Huck and Zhou (2011) for a more complex intuition and a review of the theoretical literature where increased competition might lead to more obfuscation.

  4. The instructions for the experiments can be found in the Appendices of Kalaycı and Potters (2011) and Kalaycı (2015).

  5. Ordered probit regressions and random-effects GLS regressions produce qualitatively similar results.

  6. An alternative model that uses a dummy variable for seller with the highest quality seller produces similar results, indicating no difference in obfuscation levels between high and low quality sellers.

  7. Here, I assume a randomizer would not consider abstaining from buying.

  8. Here, I again assume a randomizer would not consider abstaining from buying.

  9. I thank Eric van Damme for pointing out this issue.

  10. Notice, however, that most models of obfuscation in markets assume that buyer errors are independent of payoff differences of the goods in the market (See for example Carlin 2009; Piccione and Spiegler 2012; Chioveanu and Zhou 2013; Gu and Wenzel 2014). A notable exception is Basov and Danilkina (2015), who adopt Luce (1959)’s choice model where the probability of choosing a good depends on the utilities offered by the goods in the market and the level of aggregate obfuscation. They show in their model that aggregate obfuscation level decreases and consumer surplus increases with the number of firms in a market.

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Acknowledgments

I would like to thank Marco Faravelli, Wieland Müller, Andreas Ortmann, Natalia Shestakova, Joep Sonnemans, Eric van Damme and seminar participants at the 2010 NAKE Workshop at Utrecht University, 5th Annual Australia New Zealand Workshop on Experimental Economics, 2011 Industrial Organization: Theory, Empirics and Experiments Workshop in Otranto and 2011 ESA North American Meeting in Tucson for helpful comments. I am particularly grateful to Jan Potters for insightful comments and suggestions. Part of the study has been conducted during my visit at the University of Melbourne, I am grateful to all the faculty and staff for their hospitality. I am thankful to Netspar for financial support for the experiments.

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  1. School of Economics, University of Queensland, Colin Clark Building (39), St. Lucia, QLD, 4072, Australia

    Kenan Kalaycı

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  1. Kenan Kalaycı
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Correspondence to Kenan Kalaycı.

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Kalaycı, K. Confusopoly: competition and obfuscation in markets. Exp Econ 19, 299–316 (2016). https://doi.org/10.1007/s10683-015-9438-z

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