Strategic Confusopoly: Evidence from the UK mobile market, joint with Christos Genakos and Tobias Kretschmer. Working Paper. CEP Discussion Paper No. 1810
In this paper, we study how firms strategically choose their product portfolio, product differentiation, and prices in a competitive setting. Using a detailed data set of virtually all mobile phone tariffs offered in the United Kingdom between January 2010 and September 2012, we document that, contrary to the theoretical prediction, prices and level of product differentiation do not always evolve in the same direction. Specifically, in the early part of the period we observe, product portfolios by competitors grow closer together, but average prices increase, while in the later phase prices decline as differentiation declines. We argue that firms introduced a large number of (dominated) tariffs as an obfuscation strategy to make it difficult for consumers to compare tariffs. We show that this strategy was especially prevalent for combinations of tariffs with handsets. This study is one of the first to explore the effects of obfuscation as a firm strategy.