Failing to Choose the Best Price: Theory, Evidence, and Policy

Failing to Choose the Best Price: Theory, Evidence, and Policy Both the “law of one price” and Bertrand’s (J Savants 67:499–508, 1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and/or show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons difficult and soften competition. Possible regulatory interventions include: simplifying the choice environment, for instance by restricting price to be a scalar; advising consumers of their expected costs under each option; or choosing on behalf of consumers. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

Failing to Choose the Best Price: Theory, Evidence, and Policy

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Publisher
Springer Journals
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Economics / Management Science; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
D.O.I.
10.1007/s11151-015-9476-x
Publisher site
See Article on Publisher Site

Abstract

Both the “law of one price” and Bertrand’s (J Savants 67:499–508, 1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and/or show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons difficult and soften competition. Possible regulatory interventions include: simplifying the choice environment, for instance by restricting price to be a scalar; advising consumers of their expected costs under each option; or choosing on behalf of consumers.

Journal

Review of Industrial OrganizationSpringer Journals

Published: Sep 5, 2015

References

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