Buyer confusion and Prices

Economic theory suggests that more choice is better. Indeed, companies around the world have been offering more variety in their product and services, in order to cater to different individuals with different preferences. People can choose a smartphone based on 30 different attributes, with each of these 30 attributes having subclassifications. Barry Schwartz in his book "The Paradox of choice" presents a list of products that he came across in the market in the US. He says that there are 285 varieties of cookies, 230 soup offerings, 175 salad dressings, 275 varieties of cereal, 75 varieties of iced teas, 15 flavors of bottled water in the food section. In the pharmaceutical section, he found 61 varieties of suntan and sunblock, 80 different pain relievers, 40 options for toothpaste, 116 types of skin cream. In the electronics section, he found 6,512,000 possibilities of different stereo systems, 110 different televisions, and 85 different telephones excluding cell phones. 

Schwarts, in his book, makes the point that more choice actually hurts individuals.  Several other papers find that consumers are worse of with choice because, with more choice, there is more possibility of regret. 

Kalayci & Potters (2011) show using an experiment, that as the number of attributes increase, buyers make suboptimal choice. The more important finding in the paper is that prices of goods are higher when the number of attributes are higher. This finding is consistent with the explanation given by Scitovsky (1950).   In the paper, students play the role of sellers in a duopoly setting and determine the number of attributes their product should have and then determine the cost of their product. The paper finds that, sellers often make it overly complicated for buyers to assess the quality of the products and can raise the price of products hoping that the buyer will make mistakes, given the time constraints. The study had a condition where the computer chose the ideal product given the quality and costs and another condition where human subjects had to choose. The average price of goods was much lower in the former condition since the computer didn't make any mistakes in choosing. 

This is an important finding that explains a possible trend for the years to come. Firms are likely to continue to make more varieties of products and would continue to confuse buyers. This strategy can be easily justified by making it seem like more choice will help buyers find a product that suits their needs. We are also likely to see organizations that help buyers choose. 

To some extent, the abundance of choice would not harm those who can afford to get others to choose for them. The abundance of choice will also not affect computers who go shopping on Sundays and who do not make mistakes.    

References: 

Kalaycı, K., & Potters, J. (2011). Buyer confusion and market prices. International Journal of Industrial Organization, 29(1), 14-22.

Scitovsky, T. (1950). Ignorance as a source of oligopoly power. The American Economic Review, 40(2), 48-53.

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