Market Transparency: A Mixed Blessing?

Abstract

Antitrust practitioners and consumers protectionists often argue that market transparency should be improved to allow consumers to shop around for bargain prices thereby putting pressure on oligopolists´ pricing. We model how transparency, interpreted as the comparability from the point of view of consumers of the characteristics of goods and services, affects the outcome of a repeated oligopoly. Improved transparency may make consumers switch suppliers more easily. This increases the static temptation of individual firms to deviate from tacitly agreed prices, but at the same time the future punishment may become more severe. When the number of firms is small, the "optimal degree of transparency" may not be perfect transparency, unless the oligopolists may rely on sophisticated, optimal punishment strategies. When the number of firms grows larger, the optimal degree of transparency increases, and from some point onward perfect transparency is optimal. We discuss the various policy implications of these results.market transparency; customer switching; repeated oligopoly