Thursday, February 3, 2011
Posted by D. Daniel Sokol
Michele Piccione (LSE) and Ran Spiegler (UCL and Tel Aviv University) address 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 modeling 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. In particular, firms earn max-min payoffs in symmetric equilibria if and only if the graph that represents the comparability between formats satisfies a generalized regularity property, which we interpret as a form of “frame neutrality”. The same property is necessary for equilibrium behavior to display statistical independence between price and format decisions. We also show that narrow regulatory interventions that aim to facilitate comparisons may have an anti-competitive effect.