Competition for an imperfectly informed consumer

James Fisher | University of Technology Sydney

Offers can be complicated and hard to compare - e.g., different credit card agreements or insurance contracts. This means that after a consumer compares two competing firms' offers, she is imperfectly informed as to which is better, i.e., she is nondiscerning. Hence, she may not notice if one firm's offer is slightly better or worse than the other firm's offer. Thus, nondiscernment attenuates the usual competitive forces and so has implications for market outcomes. When the firms are symmetric, we find that increases in the consumer's discernment always lead to more competitive offers. However, if the firms are asymmetric, then increases in the consumer's discernment may cause them to reduce the values of their offers. Nevertheless, we find that increases in the "right kind" of discernment still lead to more competitive offers.