This paper develops search-theoretic models in which it is individually rational for firms to engage in obfuscation. It considers oligopoly competition between firms selling a homogeneous good to a population of rational consumers who incur search costs to learn each firm's price. Search costs are endogenized: obfuscation is equated with unobservable actions that make it more time-consuming to inspect a product and learn its price. One model involves search costs that are convex in the time spent shopping. Here, we show that even slight convexity can dramatically change the equilibrium price distribution. A second model examines an informational linkage between current and future search costs: consumers are initially unaware of the exogenous component of search costs. Here, a signal-jamming mechanism can also lead to equilibrium obfuscation. IntroductionAnyone who has shopped for a mattress, tried to compare the full sets of fees charged by multiple banks or mortgage lenders, or gotten quotes from contractors for a home renovation will find it easy to question the universality of the classic economic argument that firms will disclose all relevant information. 1 Ellison and Ellison (2009) describe practices in which firms intentionally make shopping complicated, difficult, or confusing as "obfuscation" and provide empirical evidence from online shopping. It is easy to think of reasons why it would be collectively rational for firms to practice obfuscation: equilibrium prices are increasing in consumer search costs in many search models, and price discrimination arguments can also be given. 2 Arguments based on collective rationality, however, bring up a natural critique: why collude on obfuscation rather than just colluding directly on price? In this paper, we discuss a search-based model in which it is individually rational for firms to raise consumer search costs. Diamond (1971) first formalized the connection between search costs and price levels, noting that even an ε search cost could increase prices from the competitive level to the monopoly level because consumers will have no incentive to search if they expect all firms to charge monopoly prices. Several subsequent papers developed two other important insights: there is a more natural search problem when price dispersion is present, and price dispersion will exist in equilibrium when consumers are differentially informed. 3 Our model closely follows that of Stahl (1989), who considers a continuum of consumers shopping for a homogenous good offered by N firms. A fraction µ of the consumers have no search costs and learn all firms' prices. The other 1 − µ pay a search cost of s every time they obtain a price quote. Consumers have identical downward sloping demands D(p). Stahl shows that this produces an elegant, tractable model. All consumers with positive search costs search exactly once. Firms choose prices from a nonatomic distribution on an interval [p, p] 1 See Grossman (1981) andMilgrom (1981). 2 Diamond(1971) and many subsequent papers con...
This paper develops search-theoretic models in which it is individually rational for firms to engage in obfuscation. It considers oligopoly competition between firms selling a homogeneous good to a population of rational consumers who incur search costs to learn each firm's price. Search costs are endogenized: obfuscation is equated with unobservable actions that make it more time-consuming to inspect a product and learn its price. We note two mechanisms by which obfuscation can affect consumer beliefs about future search costs: a direct effect that applies when search costs are convex in time spent searching and a signal-jamming effect that applies when an informational link is present. As long as obfuscation is costless for firms, the presence of either of these mechanisms guarantees that obfuscation must occur in equilibrium, unless consumer search costs are already so high that consumers are willing to purchase at the highest equilibrium price in the absence of obfuscation. Changes in consumer search costs are at least partially offset by changes in the equilibrium level of obfuscation, raising doubts about whether reductions in consumer search costs must make markets more competitive. We also examine patterns of obfuscation and show that higher markups are usually associated with more obfuscation.
We thank seminar participants at MIT and Canadian Institute for Advanced Research for useful suggestions The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
Mutual benefits from trust and cooperation not withstanding, inter-group conflict is pervasive. In his study of the Peloponnesian War, Thucydides (2000) traces the origins of conflict as much to fear and distrust as to other factors such as greed and honor. He argues that the Peloponnesian War became inevitable precisely because each side saw war as inevitable and did not want to relinquish the first mover advantage to the other (see also Kagan 2004).1 This view of conflict, sometimes referred as the Hobbesian view or the spiral model, has a clear dynamic implication: if Group A's actions look aggressive, Group B infers that Group A is likely to be aggressive and acts aggressively itself (e.g., Jervis 1976; Kydd 1997). Moreover, unless Group A can fully understand that Group B is acting aggressively purely in response to its own actions, it will take this response as evidence that Group B is aggressive. As a result, conflict spirals.The ubiquity of "conflict spirals" throughout history provides prima facie support for this view. A leading example is ethnic conflict: Horowitz (2000, p. 187) argues "[t]he fear of ethnic domination and suppression is a motivating force for the acquisition of power as an end" and suggests that such fear of ethnic domination was the primary cause of the rise in ethnic violence following the withdrawal of colonial 1 The fear motive for conflict is also referred to as the "Hobbesian trap" or the "security dilemma" (following Schelling 1960). It is modeled by, among others, Baliga and Sjöström (2004) and Chassang and Padro i Miquel (2010). On models of conflict spirals, different from the ones we discuss below, see also Fearon and Laitin (1996) and the references therein.
This paper studies mechanism design when agents are maxmin expected utility maximizers. A first result gives a general necessary condition for a social choice rule to be implementable. The condition combines an inequality version of the standard envelope characterization of payoffs in quasilinear environments with an approach for relating agents' maxmin expected utilities to their objective expected utilities under any common prior. The condition is then applied to give an exact characterization of when efficient trade is possible in the bilateral trading problem of Myerson and Satterthwaite, 1983, under the assumption that agents know little beyond each other's expected valuation of the good (which is the information structure that emerges when agents are uncertain about each other's ability to acquire information). Whenever efficient trade is possible, it may be implemented by a relatively simple double auction format. Sometimes, an extremely simple reference price rule can also implement efficient trade.
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