In a new article publishing in the Journal of Antitrust Enforcement, academics have found that an increase in competition can, at times, actually reduce consumer welfare.
According to the paper by academics at Oxford University and the University of Tennessee, companies may take advantage of consumers' difficulty in processing many complex options when competitive pressure is fierce. Often greater competition means better quality. The article looks at instances where the positive correlation between competition and quality breaks down. Consumers -- besides being unable at times to process many complex options -- cannot always accurately assess differences in quality. The authors use examples from the aviation, food, newspaper, and gaming industries to highlight instances where more competition means poorer quality.
They also refer specifically to advertising and marketing tools in promoting an illusion of quality. They say that misleading and deceptive advertising can distort competition, as consumers are unable to assess quality and price easily. Professor Ariel Ezrachi, co-author of the paper, says that, "when consumers acts with incomplete knowledge, and it is prohibitively difficult to convey to consumers the products' quality differences, then one cannot assume that more competition will necessarily improve the price-quality mix."
He went on to explain that the link between price and quality is more complex than one might expect, and consumers don't always get what they pay for, saying, "at times, an increase in competitive pressure may lead to horse meat in your burger rather than better quality beef." According to Ezrachi and his co-author Professor Maurice Stucke, competition authorities cannot assume that greater competition is the answer to quality concerns. They should exercise caution in markets characterized by consumers' limited ability to accurately assess quality differences and imperfect information.
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