Pricing and obfuscation with complexity averse consumers

Abstract

Competition models typically assume that consumers who cannot compare prices, buy randomly. This paper models the idea that firms may obfuscate product information to confuse consumers, but confused consumers prefer simple alternatives. We show that complexity aversion generates competition in obfuscation, in addition to prices. Markets become more transparent, which enables more consumers to understand prices and stimulates price competition. Three results are most interesting. Firstly, even when simple products are the most expensive in the market, firm profit can be lower when confused consumers favour simple products. Secondly, profit is not always lower in less obfuscated markets. Thirdly, obfuscation can only be eliminated if some consumers are always confused and policies to improve consumer sophistication can stimulate obfuscation.