Strategic Limitation of Price Comparison by Competing Firms. An Experimental Study

Résumé

This paper provides experimental evidence on strategic limitation of price comparison by competing firms. Using a laboratory based experiment, we show that firms adapt to the competitiveness of the market by making price comparison costly for consumers, thereby departing from the concept of Bertrand competition. We solve a simplified version of the game theoretical model of price complexity developed by Carlin (2009) and derive testable statistics on the effects of changes in market structure on equilibrium outcomes. The experimental data supports the theoretical predictions of the model. In particular, an increase in the number of competing firms leads to a more difficult price comparison for consumers. As a result, the share of uninformed consumers increases, which leads to higher average prices. Informed consumers still benefit from an increase in competition and pay lower prices. The firms that charge higher prices tend to make it more costly for consumers to compare prices, while the firms that charge lower prices tend to make the comparison easier for consumers. Furthermore, limiting the upper bound of the cost of comparison that firms can impose lowers market prices both for informed and uninformed consumers. As an implication, a policy that limits the extent to which firms can make it difficult for consumers to compare several offers would increase consumer welfare. Keywords: complexity, price competition, laboratory experiments