Search Cost Model of Obfuscation, A

Networks, the Internet, and Cloud Computing, Internet and Search and Advertising

Article Snapshot

Author(s)

Glenn Ellison and Alexander Wolitzky

Source

NBER Working Paper No. 15237, August 2009

Summary

This paper looks at retailers’ responses to consumers’ efforts to compare prices.

Policy Relevance

Retailers might make it hard for consumers to learn about products and prices, but this can be costly for retailers. In real life consumer searches work fairly well.

Main Points

  • Some retailers seem to adopt practices (“obfuscation”) that make it hard for customers to easily price shop and compare products. E.g., banks have complex fee structures.
    • Retailers try to avoid price wars between competitors that eat away profits.
    • This could harm consumers by delays in understanding deals and by paying higher prices.

  • Our model shows that when it becomes easier and cheaper for consumers to search, obfuscation is likely to increase and prices will not necessarily fall.
    • Obfuscation has costs for sellers, too. E.g. Banks must hire customer service staff to explain complicated fees to customers. These costs limit obfuscation.

  • The costs of obfuscation to sellers tend to mean that products with higher markups obfuscate more.

  • If the first seller site a buyer visits offers a product at a low price, the buyer might go ahead and buy without searching further. But if the buyer expects future searches to be easy, he might go ahead and search further.
    • If a site obscures information too much, buyers might give up and look for other options rather than buying.

  • In reality, because of limits on obfuscation, buyers do seem to be able to search successfully on the Internet and in other venues and find good deals.

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