Choice Complexity and Market Competition∗

Consumers often find it hard to make correct value comparisons between market alternatives. This "choice complexity" partly results from deliberate obfuscation by firms. This review synthesizes a theoretical literature that analyzes the role of choice complexity in otherwise-competitive markets. I identify two general classes of models in the literature: (1) firms’ obfuscation strategy is an independent "framing device" that affects the probability with which consumers make correct comparisons; (2) market alternatives are multi-dimensional objects, such that obfuscation is captured by "lopsided" location in multi-dimensional space, which lowers the probability of being dominated by another market alternative. I address the following key questions: What is the effect of competition on consumers’ choice complexity? What is the relation between choice complexity and payoff-relevant aspects of the market outcome? What is the role of consumer protection measures? By and large, the market models in this review suggest that equilibrium obfuscation and choice complexity increase in response to intensified competition, and this weakens the otherwise-positive effect of competition on consumer welfare. However, equilibrium effects can also attenuate the positive welfare effects of regulatory interventions. ∗This project enjoyed financial support from the European Research Council, Grant no. 230251. †Tel Aviv University, University College London and CFM. URL: http://www.tau.ac.il/~rani. Email: [email protected]