Preferences, Confusion and Competition

Existing literature has argued that firms benefit from confusing consumers of homogeneous goods. This paper shows that this insight generally breaks down with differentiated goods and heterogeneous preferences: with polarised taste distributions, firms fully educate consumers. In cases where firms nevertheless confuse consumers, the welfare consequences are worse than for homogeneous goods, as consumers choose dominated options. Similar insights are also obtained for political contests, in which candidates compete for voters with heterogeneous preferences: parties choose ambiguous platforms only when preferences are 'indecisive', featuring a concentration of indifferent voters.

Automated summary

Existing literature suggests that confusing consumers of homogeneous goods benefits firms, but this is not the case for differentiated goods and heterogeneous preferences. When taste distributions are polarized, firms choose to fully educate consumers instead. If firms still confuse consumers in this case, the welfare consequences are worse than for homogeneous goods because consumers choose dominated options. Similar findings are also applicable to political contests, where candidates compete for voters with heterogeneous preferences: parties only choose ambiguous platforms when preferences are "indecisive" and there is a concentration of indifferent voters.