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Annual Review of Economics

Volume 8, 2016

Choice Complexity and Market Competition

Abstract

Consumers often find it hard to make correct value comparisons between market alternatives. Part of this choice complexity is the result of deliberate obfuscation by firms. This review synthesizes a theoretical literature that analyzes the role of choice complexity in otherwise competitive markets. I identify two general classes of market models in the literature: () The obfuscation strategy of firms is an independent framing device that affects the probability with which consumers make correct comparisons, and () market alternatives are multiattribute objects, and obfuscation is captured by lopsided location in attribute space, lowering the probability of being dominated by another market alternative. I address the following key questions: What determines the amount of choice complexity in market equilibrium? What is the relation between choice complexity and payoff-relevant aspects of the market outcome? What is the role of consumer protection measures? The models surveyed in this review suggest that equilibrium obfuscation and choice complexity increase in response to intensified competition, mitigating the positive effect of competition on consumer welfare. However, equilibrium effects can also attenuate the positive welfare effects of regulatory interventions.

Keyword(s): behavioral industrial organization, bounded rationality, choice complexity, competition, default bias, framing, limited comparability
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/content/journals/10.1146/annurev-economics-070615-115216
2016-10-31
2024-04-23
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