Competition over agents with boundedly rational expectations
AbstractI study a market model in which profit-maximizing firms compete in multi-dimensional pricing strategies over a consumer, who is limited in his ability to grasp such complicated objects and therefore uses a sampling procedure to evaluate them. Firms respond to increased competition with an increased effort to obfuscate, rather than with more competitive pricing. As a result, consumer welfare is not enhanced and may even deteriorate. Specifically, when firms control both the price and the quality of each dimension, and there are diminishing returns to quality, increased competition implies an efficiency loss which is entirely borne by consumers.
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Bibliographic InfoArticle provided by Econometric Society in its journal Theoretical Economics.
Volume (Year): 1 (2006)
Issue (Month): 2 (June)
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Web page: http://econtheory.org
Bounded rationality; industrial organization; multi-dimensional pricing; law of small numbers; market exploitation; obfuscation;
Other versions of this item:
- Ran Spiegler, 2005. "Competition over Agents with Boundedly Rational Expectations," Levine's Bibliography 122247000000000535, UCLA Department of Economics.
- C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
- D49 - Microeconomics - - Market Structure and Pricing - - - Other
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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