Choosing not to compete: Can firms maintain high prices by confusing consumers?

Abstract

Firms with very similar products often present their products in different ways. This makes it difficult for consumers to find out which product fits their needs best, or which one is the cheapest. Why is there no convergence toward common ways to present products? Is it possible for firms to maintain high prices by confusing consumers? We run a market experiment to investigate those questions. In our market, firms choose how to present their products in addition to choosing their price. We find that firms maintain different ways to present their products and that this allows them to maintain high prices. This behavior is not consistent with competitive behavior, such as when firms adopt best responses to each other, imitate the most successful firm, or learn the best strategy over time. Rather, our results are only consistent with cooperation between firms. Firms cooperate by not imitating the way other firms present their products. Cooperation is maintained by the threat of tough competition if a firm makes its product easy to compare with others. Firms are all the more likely to maintain such cooperation if their products do not actually differ much. This is because in that case, maintaining differences in the presentation of their products is the only way to maintain profits.

Unfair commercial practices in a pit market: evidence from an artefactual field experiment

“…Most of the legal debate internalizes a demand approach, centred on eliciting consumers' response to specific practices (Huck & Wallace, 2015), thereby limiting the scope of the analysis. Industrial economists have paid more attention to the supply side, studying the consequences of the use of shrouding and complexity as anti-competitive tools (Kalayci & Potters, 2011;Gu & Wenzel, 2015Kalaycı, 2016;Crosetto & Gaudeul, 2017;Normann & Wenzel, 2019;Rasch et al, 2020). However, this body of literature continues to overlook the endogenous choice of practices from a menu of options (instead of a simple extensive margin) and misleading use (instead of simple adoption).…”

Shrouding Add‐On Information: An Experimental Study*

“…We share our focus on collusive effects with the study by Crosetto and Gaudeul (2017), who report an experiment where sellers can choose a price and a price format. They find that, if rivals' behavior is observable, firms are able to coordinate on different price formats, which is consistent with tacit collusion on price formats.…”

Obfuscation in Competitive Markets

“…These experiments neither allow for interactions in markets nor is there competition among the players. The other part of the literature (Kalayci and Potters, 2011;Kalayci, 2015, Gu andWenzel 2015;Kalayci 2016;Crosetto and Gaudeul 2017) studies obfuscation in market environments. However, none of the papers mentioned above shows that surplus-enhancing obfuscation opportunities enable the sellers to escape the zero-profit trap by enforcing stable long-run profits in an otherwise competitive environment.…”