Working Paper No. 1379

Obfuscation and Rational Inattention in Digitalized Markets

Published: January 20, 2021Pages: 33Keywords: Rational Inattention; Obfuscation; Price Competition; Digitalized MarketsJEL-codes: D11; D21; D43

Obfuscation and Rational Inattention in Digitalized Markets Aljoscha Janssen and Johannes Kasinger


This paper studies the behavior of competing firms in a duopoly with rational inattentive consumers. Firms play a sequential game in which they decide to obfuscate their individual prices before competing on price. Probabilistic demand functions are endogenously determined by the consumers'
optimal information strategy, which depends on the firms' obfuscation choice and the consumers' unrestricted prior beliefs. We show that the game may result in an obfuscation equilibrium with high prices where both firms obfuscate and a transparency equilibrium with low prices and no obfuscation, providing an argument for market regulation. Lower information costs and asymmetric prior beliefs about prices reduce the probability of an obfuscation equilibrium. Using data on Sweden, we document a decrease in price complexity and corresponding prices in the market for mobile phone subscriptions in the last two decades. Our model rationalizes these changes and explains why complexity and high prices persist in some but not all digitalized markets.


Reference:

Janssen, Aljoscha and Johannes Kasinger (2021), "Obfuscation and Rational Inattention in Digitalized Markets". IFN Working Paper No. 1379. Stockholm: Research Institute of Industrial Economics (IFN).

Interdisciplinary European Studies

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This book explores the complex and ever-changing relationship between the European Union and its member states. The recent surge in tension in this relationship has been prompted by the actions of some member state governments as they question fundamental EU values and principles and refuse to implement common decisions seemingly on the basis of narrowly defined national interests.

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