Collusive Shrouding and Cartelization

Abstract

We investigate the impact of consumer myopia on competition and firm behavior. In our model, firms repeatedly sell a primary good and a respective add-on. We study the impact of consumer myopia in the add-on market on pricing and on the ability of firms to engage in collusion. We show that in a situation in which firms cartelize and charge monopoly prices, limited attention makes deviation from such collusive behavior less rewarding and hence facilitates collusion. In particular, we determine the incentives of firms to educate consumers. We find that a shrouded market in which no firm educates consumers is a sign for cartelization. Hence, if obfuscation is observed in a market, it can serve as a proxy signal for illegal industry agreements.

Keywords: limited attention, consumer education, add-on pricing, collusion, shrouding, unshrouding

JEL Classification: D40, D80, L10, L15