Working Paper: CEPR ID: DP14700
Authors: Andreas Hefti; Shuo Liu; Armin Schmutzler
Abstract: Do firms seek to make the market transparent, or do they confuse consumersin their product perceptions? We show that the answer to this question dependsdecisively on preference heterogeneity. Contrary to the well-studied case of homogeneousgoods, confusion is not necessarily an equilibrium in markets with differentiatedgoods. In particular, if the taste distribution is polarized, so that indifferentconsumers are relatively rare, firms strive to fully educate consumers. By contrast,if the taste distribution features a concentration of indecisive consumers, confusionbecomes part of the equilibrium strategies. The adverse welfare consequences ofconfusion can be more severe than with homogeneous goods, as consumers may notonly pay higher prices, but also choose a dominated option, or inefficiently refrainfrom buying. Qualitatively similar insights obtain for political contests, in whichcandidates compete for voters with heterogeneous preferences.
Keywords: obfuscation; consumer confusion; differentiated products; price competition; polarized-indecisive preferences; political competition
JEL Codes: D43; L13; M30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| polarized taste distribution (C46) | firms strive to educate consumers (L21) |
| concentration of indecisive consumers (D80) | confusion becomes part of equilibrium strategy (C73) |
| consumer preferences (D11) | firms’ strategies (L21) |
| confusion (D80) | adverse welfare consequences (I38) |
| indecisive voters (D79) | political candidates choose ambiguous platforms (D72) |
| voter preference distribution (D79) | candidates' communication strategies (D79) |