Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/216845
Authors: 
Hefti, Andreas
Liu, Shuo
Schmutzler, Armin
Year of Publication: 
2020
Series/Report no.: 
Working Paper 344
Abstract: 
Do firms seek to make the market transparent,or do they confuse the consumers in their product perceptions? We show that the answer to this question depends decisively on preference heterogeneity. Contrary to the well-studied case of homogeneous goods, confusion is not necessarily an equilibrium in markets with differentiated goods. In particular, if the taste distribution is polarized, so that indifferent consumers are relatively rare, firms strive to fully educate consumers. By contrast, if the taste distribution features a concentration of indecisive consumers, confusion becomes part of the equilibrium strategies. The adverse welfare consequences of confusion can be more severe than with homogeneous goods, as consumers may not only pay higher prices, but also choose a dominated option, or inefficiently refrain from buying. Qualitatively similar insights obtain for political contests, in which candidates compete for voters with heterogeneous preferences.
Subjects: 
Obfuscation
consumer confusion
differentiated products
price competition
polarized/indecisive preferences
political competition
JEL: 
C93
I21
I24
I26
J24
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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