Consumer Marketing Question

The more choices a person is faced with, the less likely they are to make a choice at all. People are almost 10 times more likely to buy jam if they have to choose from 6 jams than if they have to choose from 24. For every 10 extra funds in a 401k program, participation goes down 2%. People don't like having too many choices, unless the choices is fun to make and variety adds real value (like choosing sundae toppings, or in nerdy cases, configuring a new computer).

OK, keep that in mind. Now consider marketing tactics: multiple brand names is often a dominant strategy. If there are 6 laundry detergents on the shelf, and people randomly select, Company A has a 17% market share. But by coming out with 4 new brands, all pretty much the same thing, they now have 5/10 instead of 1/6. 50% market share. And that strategy also works with just about everything else in the grocery store.

Now combine these, and you have a real prisoner's dilemma in consumer goods marketing. More brands and choices means a bigger slice of the pie for a company. But more brands and choices also means a smaller overall pie for non-essential products.

How do companies balance out these interests? There's clearly a rational limit on the number of choices you can offer in a grocery store, but that number--and the number of choices many consumers are given--is almost certainly larger than the number that would maximize the size of the pie. And there's another cost--as producer sales and producer surplus rise, consumer surplus also rises, because individuals won't feel incentivized to skip a first choice product for a substitute that's easier to navigate. At the very least, it lowers transaction costs (choosing costs, including effort and time), which is a gain for consumers.

How does this tug of war dynamic play out in marketplaces? Would it even be legal for companies to agree to limit branding diversity, even if it's for everyone's benefit? Is there a simple strategy, like in a prisoner's dilemma problem, that's clearly dominant? Or even a simple strategy that's clearly good?