Strategic Price Complexity in Retail Financial Markets

The study is motivated by puzzling empirical evidence in retail financial markets where the law of one price fails. Even though many firms sell nearly identical financial products, there is persistent price dispersion, and prices do not fall to marginal cost despite new entry. The paper seeks to explain these anomalies by focusing on how firms strategically introduce complexity into their price structures. This complexity reduces consumer understanding, thereby allowing firms to retain market power and sustain higher prices.

To investigate this, the author develops a two-stage oligopoly model of homogeneous financial products. In the first stage, firms simultaneously set both a price and a level of price complexity. Complexity is modeled as features in fee structures, technical language, or omission of information that make it difficult for consumers to compare offers. The model assumes that consumers can be either “experts,” who are informed and always purchase from the lowest-priced firm, or “uninformed,” who are unable to evaluate prices and choose randomly. In the second stage, firms compete for both consumer types, and equilibrium outcomes are derived.

The results show that price dispersion arises naturally in equilibrium because complexity prevents full consumer awareness. Firms never set prices at marginal cost, since they can earn rents from uninformed consumers. Importantly, low-price firms prefer less complexity (to signal their advantage), while high-price firms prefer more (to obscure their disadvantage). The model demonstrates that the strategic interaction between these types of firms guarantees a non-degenerate distribution of prices and persistent dispersion.

The analysis further reveals that increased competition intensifies complexity. As more firms enter the market, each firm’s chance of attracting informed consumers falls, leading them to add more complexity to maximize revenue from uninformed buyers. Paradoxically, greater competition can increase industry profits by raising opacity, reducing consumer knowledge, and sustaining higher overall prices. The model predicts a negative relationship between industry concentration and price complexity, a testable implication consistent with observed trends in financial markets.

In conclusion, the paper provides a theoretical explanation for the persistent price dispersion and above-marginal-cost pricing in retail financial markets. By showing how firms endogenously create consumer ignorance through complexity, the study highlights important welfare implications: consumers may systematically overpay, and transparency decreases as competition rises. The findings contribute to the broader literature on oligopoly pricing and consumer search by introducing a novel “hide-and-seek” framework in which firms strategically manipulate the information environment.

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