by Stephen McDonald and Colin Wren
This paper argues that a firm with multiple brands can obfuscate consumer search by excluding the brands of other firms from a consumer’s consideration set. This is examined empirically by regressing price data for a leading U.K. motor insurance price comparison site (or “shopbot”). It finds that multibrand firms own three‐quarters of brands in this market, and that allowing for other brand strategies, they post significantly lower and clustered prices relative to other firms. The firms also conceal their brand ownership, consistent with search obfuscation. The results are not otherwise explained and they have implications for market competitiveness.
See also the following article from Newcastle University:
The following section is a Q&A with Dr. Stephen McDonald and Prof. Colin Wren
- Please briefly describe the main results of your paper.
The Internet potentially gives much greater market power to the consumer, but on motor insurance price comparison websites (i.e., ‘shopbots’) we observe that firms adopt a strategy to make this consumer search less effective. Consumers at shopbots often adopt a two-stage search process – initially they select the lowest-priced brands to form a consideration set, and subsequently they conduct further searches on the product characteristics (e.g., the deductible and other policy attributes) in order to make a purchase. Firms can potentially obfuscate this search by having many brands and using them to crowd out other firms from the consideration set. To do this they must not disclose ownership of their brands, as the firm name reveals information about the reputation and trust of the seller, and if known it might cause a consumer to quickly dismiss all but the cheapest brand from the same firm. We examine a mature online market, the UK motor insurance market, and find evidence that firms do indeed act to obfuscate consumer search in this way. We find that the firms do not openly declare their ownership of brands and that the multibrand firms tend to pitch their prices lower and to cluster them, which is consistent with them trying to crowd out other firms from consumers’ consideration sets. The problem is acute, since of the 80 or so brands that typically quote in response to an online enquiry, three-quarters are owned by just 16 firms.
- How does your focus differ from previous explorations of multibrand pricing and consumer search obfuscation in online markets?
The idea of multibrand pricing as a strategy for consumer search obfuscation has been around for some time, but conceived in terms of offline markets. For example, pairs of firms can ‘capture’ all those consumers who sample both of their products only, and charge them a higher price to increase profits, as long as they do not disclose this to the consumers. However, this works less well in online markets, as it relies on the firms being able to exclude all other firms from the consumer consideration set, whereas in Internet markets consumers are able to search very many sellers. Nevertheless, in these online markets different strands of research have focused on search obfuscation as a device used by firms to lessen the power of consumer search. One stream of the literature assumes consumers are rational and can correctly infer all prices, so that it focuses on devices like product ‘add-ons’ that are revealed only at the time of purchase. Another stream supposes consumers have limited rationality, and it considers framing and pricing strategies that either confuse the consumer or lead to the adoption of simple heuristics. Our idea really falls under this second stream, but as far as we are aware it has not previously been considered in the literature.
- What first sparked your interest in this topic?
We have done some previous work using data for motor insurance price comparison sites (shopbots), and we were struck by how many of these brands seemed to be owned by a relatively small number of firms. We were also struck by the fact that firms’ ownership of the brands is not openly disclosed, and often not even by click-through to the seller’s website, suggesting that firms gain an advantage by not disclosing their brand ownership. Some of these brands are clearly differentiated, e.g., targeted at female or older drivers, and others are ‘branded’, e.g., using the name of a well-known retailer. However, many are only weakly advertised (the multibrand firms tend to spend virtually all of their advertising on a single brand only) and seem to perform no other role, so this sparked our interest. It fits well with the recent interest in search obfuscation as a means by which businesses seek to wrestle back some market power in online markets. Nevertheless, despite this interest, there are relatively few empirical studies of this behaviour in the literature.
- In the paper, you examine this topic by regressing price data for a UK motor insurance price comparison site. What led you to choose this particular source of data? In what other contexts might we expect to see similar results?
The UK motor insurance market is fertile ground for this study since it is a mature market, with high levels of consumer search and engagement. Furthermore, it is monopolistically competitive, but regulated, so that with enough spadework it is possible to discover quite a lot about the firms, such as the brand ownership. This may be more difficult in other markets, such as consumer electronics or books, where there are many sellers. Since it is cheap and easy to create an online brand, we wouldn’t be surprised if this search obfuscation behaviour is endemic to other markets, especially the above kinds of retail market. Indeed, who knows who owns all the sellers that are listed at Amazon Marketplace or on eBay?
- What are some possible managerial implications of this work?
We think that the research offers insights on the nature of competition on price comparison websites. All of these sites seem to have some ‘bottom-feeders’ that survive despite never seeming to offer low prices, perhaps because they pick-up shoppers that search poorly or do not care about prices that much. However, what we find is that the insurers that list on these sites that appear to be the most price competitive tend to back up these low prices by having multiple brands. Given the ease with which prices can be adjusted and communicated to consumers, online markets are dynamic, while the consideration sets of the consumers may be small (experimental evidence is that the consideration set size is about five brands). However, our research suggests that by posting prices low and clustered, the online sellers are able to get their brands into sufficient number of these sets to make it worthwhile.
- What directions might you suggest for further research?
Our paper provides evidence that multibrand pricing as a strategy for search obfuscation exists, but it doesn’t explain under what conditions it might be optimal, so this might be a useful avenue for theoretical research. In addition to increasing the effectiveness of consumer search, online markets give producers the ability to monitor the prices that are set by their competitors, either on other price comparison websites or the sellers’ own sites. This has led to what are known as ‘most-favoured nation’ clauses, whereby the comparison sites restrict the prices that sellers may charge elsewhere. These clauses have been a focus for regulators, both in the US and Europe, and a future direction for our research is to explore their effect.