Ordered search and equilibrium obfuscation

Abstract

This paper demonstrates the incentives for an oligopolist to obfuscate by deliberately increasing the cost with which consumers can locate its product and price. Consumers are allowed to choose the optimal order in which to search firms and firms are able to influence this order through their choice of search costs and prices. Competition does not ensure market transparency -equilibrium search costs are positive and asymmetric across firms. Intuitively, an obfuscating firm can soften the competition for consumers with low time costs by inducing the remaining consumers to optimally first search its rival.

Failing to Choose the Best Price: Theory, Evidence, and Policy

“…They find positive correlations between market level obfuscation, price levels, and price dispersion, consistent with the idea that obfuscation raises search costs (Ellison and Wolitzky, 2012) and search costs raise both price levels and price dispersion (Stahl, 1989). Muir et al (2013) also find negative correlation between market concentration and obfuscation, consistent with the idea that obfuscation is employed to soften competition (Carlin, 2009;Wilson, 2010;Ellison and Wolitzky, 2012). Finally, Muir et al (2013) find that, within markets, firm prices are positively correlated with obfuscation.…”

“…Naturally, a firm with a cost advantage over its competitors might both set a low price and try to facilitate price comparison shopping. In other cases, however, firms may find it more profitable to intentionally obfuscate their prices, making them more complex and less transparent simply to make it harder for consumers to comparison shop (Carlin, 2009;Wilson, 2010;Ellison and Wolitzky, 2012). Models of search typically predict that search costs raise equilibrium prices (e.g.…”

“…While Ellison and Ellison (2009) study obfuscation in a single market, Muir, Seim and Vitorino 6 Wilson (2010) provides an alternative explanation that works when firms' search costs are independent. In contrast to Ellison and Wolitzky (2012), Wilson (2010) assumes that (1) consumers can observe how time consuming it will be to learn a firm's price, (2) consumers can choose to begin their search at a firm with transparent prices (low search costs), and (3) firms choose obfuscation levels before prices.…”

“…In contrast to Ellison and Wolitzky (2012), Wilson (2010) assumes that (1) consumers can observe how time consuming it will be to learn a firm's price, (2) consumers can choose to begin their search at a firm with transparent prices (low search costs), and (3) firms choose obfuscation levels before prices. In this setting, Wilson (2010) shows that obfuscation can be more profitable than transparency by providing commitment to softer price competition in the second stage of the game.…”

Choosing Whether to Compete: Price and Format Competition with Consumer Confusion

“…Such limitations include for example limits on the ability to consider all options due to search costs (Carlin, 2009;Wilson, 2010;Ellison and Wolitzky, 2012), difficulties in evaluating and comparing products (Spiegler, 2006;Piccione and Spiegler, 2012;Gaudeul and Sugden, 2012;Chioveanu and Zhou, 2013;Spiegler, 2014), or naivety in not considering the hidden costs of using a product (Ellison, 2005;Gabaix and Laibson, 2006;Heidhues et al, 2012;Wenzel, 2014). The literature generally argues that firms can exploit the limitations of consumers even when market conditions are otherwise competitive.…”