Spurious Complexity and Common Standards in Markets for Consumer Goods
CCP Working Paper No. 07-20
36 Pages Posted: 5 Dec 2007
Date Written: November 2007
Behavioural and industrial economists have argued that, because of cognitive limitations, consumers are liable to make sub-optimal choices in complex decision problems. Firms can exploit these limitations by introducing spurious complexity into tariff structures, weakening price competition. This paper models a countervailing force. Consumers' choice problems are simplified if competing firms follow common conventions about tariff structures. Because such a 'common standard' promotes price competition, a firm's use of it signals that its products offer value for money. If consumers recognize this effect, there can be a stable equilibrium in which firms use common standards and set competitive prices.
Keywords: decision-making, naïve consumers, savvy consumers, price competition, common standard effect, cognitive limitations
JEL Classification: D83, L13, L15, L51
Suggested Citation: Suggested Citation