Wednesday, April 7, 2010
Posted by D. Daniel Sokol
Michele Piccioney (LSE) and Ran Spiegler (UCL and Tel Aviv University) explore Price Competition under Limited Comparability.
ABSTRACT: This paper studies market competition when firms can influence consumers' ability to compare market alternatives, through their choice of price "formats". We introduce random graphs as a tool for modelling limited comparability of formats. Our main results concern the interaction between firms' equilibrium price and format decisions and its implications for industry profits and consumer switching rates. We show that narrow regulatory interventions that aim to facilitate comparisons may have adverse consequences for consumer welfare. Finally, we argue that our limited-comparability approach provides a new perspective into the phenomenon of product differentiation.