Price obfuscation: what is it and what effects does it have?

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School of Business | Bachelor's thesis
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Date
2017
Major/Subject
Mcode
Degree programme
Taloustiede
Language
en
Pages
24
Series
Abstract
This thesis is a literature survey discussing three price obfuscation theories by Diamond (1971), Stahl (1989) and Hämäläinen (2017a) and also some empirical real-life implications of these models. The purpose of this thesis is to gain a basic understanding on price obfuscation with search costs. They are additional costs that consumers face when they are trying to find a price quote for a certain good. We will take a look at how and why firms set these additional costs, how consumer behavior changes, what happens to total welfare and market equilibrium and what effects regulatory interventions would have. We will see that search costs create deadweight loss leading to a decrease in total welfare. The allocation of consumer and producer surplus changes making firms better off due to higher prices than in perfectly competitive markets. Asymmetric information in the market allows this shift from perfect competition equilibrium to another one in which price competition is alleviated and prices are higher. Regulatory interventions can increase consumer surplus but it is not always the case. Firms prefer to use price obfuscation if it is common in that market because by doing so they will get higher revenue.
Description
Thesis advisor
Murto, Pauli
Mustonen, Mikko
Ilmakunnas, Pekka
Keywords
price competition, price obfuscation, search costs, asymmetric information, welfare analysis
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