Dynamic competition in deceptive markets

Johannes Johnen

No 2017036, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: In many deceptive markets, firms design contracts to exploit mistakes of naive consumers. These contracts also attract less profitable sophisticated consumers. I study such markets when firms compete repeatedly and gather usage data about their customers which is informative about the likelihood of a customer being sophisticated. I show in a benchmark model that firms do not benefit from private information in this setting when all consumers are rational. I find that in sharp contrast to a model with only rational consumers, this customer information mitigates competition and is of great value to its owner despite intense competition. I discuss several implications of the value of customer information on naiveté. Private information on customers’ sophistication induces profits that are bell-shaped in the share of naive consumers. Firms prefer an even mix of both customer types. I also show that if firms can educate (some) naives about hidden fees, competition is already mitigated when firms compete for customers with initially symmetric information. I analyze a policy that discloses customer information to all firms and thereby increases consumer surplus. I discuss how the UK governments’ midata program might induce crucial aspects of this policy, and illustrate the obustness of results through several extensions.

Keywords: Consumer mistakes; deceptive products; shrouded attributes; big data; targeted pricing; consumer data; add-on pricing; price discrimination; industry dynamics (search for similar items in EconPapers)
JEL-codes: C22 C58 (search for similar items in EconPapers)
Date: 2017-12-20
New Economics Papers: this item is included in nep-big, nep-com, nep-cta, nep-mic and nep-mkt
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Dynamic competition in deceptive markets (2020)
Working Paper: Dynamic Competition in Deceptive Markets (2020)
Working Paper: Dynamic Competition in Deceptive Markets
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2017036

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