Using Complication to Reduce Price Competition

Using Complication to Reduce Price Competition^[2]

You’re offered a choice between two long-distance services. One plan charges you ten cents a minute and the other nine. Obviously, you go with the cheaper plan. Long-distance providers, however, rarely provide such a stark choice. They offer you complicated pricing plans that make it difficult to compare long-distance packages.^[3]

Complications reduce the damage of price competition. When firms compete directly on price, it’s easy for customers to compare. Consequently, there is a massive benefit for every firm to undercut its rivals. When everyone uses complicated pricing schemes, however, the benefits to undercutting your rival diminish since customers will be challenged to find the low-cost provider.

Airlines achieve complicated pricing through frequent-flyer programs.^[4] Frequent-flyer miles effectively change the price of airline tickets and make it difficult to determine which airline offers the lowest price and consequently reduce the benefit to firms of undercutting their rivals.

^[2]See also Brandenburger and Nalebuff (1996), 222–228.

^[3]Ibid., 225.

^[4]Ibid., 134–138.