Preferences, Confusion and Competition

Abstract

Existing literature has argued that firms benefit from confusing consumers of homogeneous goods. This paper shows that this insight generally breaks down with differentiated goods and heterogeneous preferences: With polarized taste distributions, firms fully educate consumers. In cases where firms nevertheless confuse consumers, the welfare consequences are worse than for homogeneous goods, as consumers choose dominated options. Similar insights are also obtained for political contests, in which candidates compete for voters with heterogeneous preferences: Parties choose ambiguous platforms only when preferences are ‘indecisive’, featuring a concentration of indifferent voters.