Why Are There Confusopolies?

Confusopoly: A group of companies with similar products who confuse customers instead of competing on price and quality.[1]


Market structures

In competitive markets, companies selling similar services compete for customers by offering better prices or higher-quality products and services. In an idealized, perfectly competitive market, competition between companies will eventually lead to a situation where the market price of an item is the same as the cost of producing that item. In other words, the market eventually settles into an equilibrium where companies break even but make zero profit.[2]

Since competition reduces profits, companies have strong incentives to avoid becoming participants in highly competitive markets. Oligopolies and monopolies are well-known examples of market structures that allow companies to avoid profit-reducing competition.

Confusopolies

One necessary condition for a perfectly competitive market is “perfect information.”[3] Perfect information exists when consumers are fully aware of the price and quality of goods and services available to them.[4]

A confusopoly is a market structure that can occur when (1) barriers prevent consumers from having perfect information (or anything remotely close to it) and (2) companies are responsible for creating some of those barriers.[5] Some products are naturally confusing (e.g., complicated scientific instruments). Industries that sell those products are not automatically confusopolies. Confusopolies exist when the major players in an industry unnecessarily add to the confusion.

Creating confusion

There are a lot of common pricing strategies that cause confusion for consumers. For example:

  • Taxes, fees, and surcharges can be added to the base price of a product.
  • Instead of selling products and services separately, several items can be bundled together and sold for a single price.
  • Companies can sell services with long-term contracts without being upfront about the conditions of the contract.

Similarly, companies can easily confuse consumers about product quality:

  • Lots of entities rate and review products. Companies can choose to mention the results from whatever entity puts them in the most favorable light.
  • Companies can mislead consumers about consumers’ own needs.
  • Companies can withhold information about known downsides of their products.

Conditions that permit confusopolies

For a confusopoly to exist, an industry needs to make it costly or time-consuming for consumers to become well-informed.

Sometimes quality evaluation is easy. Buying a Pepsi and Coke and tasting them both takes only a few minutes and almost no money. For this reason, the soda industry can’t easily confuse consumers about quality. On the other hand, purchasing cell phones with all the major providers and comparing the quality of the providers would be incredibly time-consuming and expensive. Similarly, doing research to understand the quality of the hardware behind each provider’s network would take specialized skills and a lot of effort.

In the same way, some types of products more easily lend themselves to confusing pricing schemes. Historically, loaves of bread have been sold for a flat, one-time payment. Imagine a bakery began selling loaves of bread using a contract committing buyers to 12 separate 10-cent monthly payments with a surcharge for the temperature of the bread the time of sale. No one would buy bread at that bakery. On the other hand, a cell phone service provider charging a monthly rate with additional charges, taxes, and fees feels pretty natural and in line with the norms around the type of service being sold.

Accordingly, the mobile phone service industry is likely to be a confusopoly while the soda and bread industries are almost certainly not going to be confusopolies.

Avoiding third-party evaluation

Confusopolies are more likely to arise in industries where objective quality evaluation is hard. Imagine that the only relevant aspect of cell phone service quality was download speed in downtown San Francisco. An organization could buy a cell phone and test download speeds with each major cell phone service provider. The results of the test could be published—giving the world a simple, objective ranking of provider quality.

Of course, the real world is much more complicated. Download speeds vary by location. Voice service quality also matters. Some carriers have coverage in more areas. Some carriers are compatible with more types of phones than others.

When quality evaluation can be done in a simple and objective way, third-party evaluators can do some research, share it with consumers, and break down information barriers that would otherwise prevent consumers from being informed. However, third-party evaluators will have a hard time in situations where:

  • Several different aspects of a product need to be evaluated
  • Some aspects of a product can’t be evaluated with an objective metric
  • Consumers have different preferences about the relative importance of each aspect of a product

Footnotes

  1. The word was first coined and defined by Scott Adams in The Dilbert Future. Adams defines the word a bit differently than I do.
  2. “Under perfect competition, there are many buyers and sellers, and prices reflect supply and demand. Companies earn just enough profit to stay in business and no more. If they were to earn excess profits, other companies would enter the market and drive profits down.”
    Investopedia — Perfect Competition (archived copy). Accessed 3/9/2018.
  3. A list of other conditions considered necessary can be found in a section of Wikipedia’s article on perfect competition (archived copy).
  4. “In economics, perfect information is a feature of perfect competition. With perfect information in a market, all consumers and producers are assumed to have perfect knowledge of price, utility, quality and production methods of products, when theorizing the systems of free markets, and effects of financial policies.”
    From Wikipedia’s article on perfect competition
    (archived copy). Accessed 3/9/2018.
  5. Confusopolies are a subset of a well-established market structure, monopolistic competition. Confusopolies exist in monopolistically competitive markets when producers pursue product differentiation in ways that are confusing and not beneficial for the typical consumer.

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