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Competition over Agents with Boundedly Rational Expectations

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  • Ran Spiegler

Abstract

I 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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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000000535.

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Date of creation: 21 Nov 2005
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Handle: RePEc:cla:levrem:122247000000000535

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  1. Salop, Steven, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 393-406, October.
  2. Rabin, Matthew, 2000. "Inference by Believers in the Law of Small Numbers," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt4sw8n41t, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Stefano Della Vigna & Ulrike Malmendier, 2004. "Contract Design and Self-control: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(2), pages 353-402, May.
  4. Glenn Ellison & Sara Fisher Ellison, 2004. "Search, Obfuscation, and Price Elasticities on the Internet," NBER Working Papers 10570, National Bureau of Economic Research, Inc.
  5. Osborne, Martin J & Rubinstein, Ariel, 1998. "Games with Procedurally Rational Players," American Economic Review, American Economic Association, American Economic Association, vol. 88(4), pages 834-47, September.
  6. Michele Piccione & Ariel Rubinstein, 2010. "Modeling the Economic Interaction of Agents with Diverse Abilities to Recognize Equilibrium Patterns," Levine's Working Paper Archive 506439000000000108, David K. Levine.
  7. Rubenstein, A., 1991. "On Price Recognition and Computational Complexity in a Monopolistic Model," Papers, Tel Aviv 35-91, Tel Aviv.
  8. Rani Spiegler, 2005. "The Market for Quacks," Levine's Bibliography 784828000000000634, UCLA Department of Economics.
  9. Roger B. Myerson, 1992. "Incentives to Cultivate Favored Minorities under Alternative Electoral Systems," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1000, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Wilson, Charles A, 1988. "On the Optimal Pricing Policy of a Monopolist," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(1), pages 164-76, February.
  11. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  12. Eliaz, Kfir & Spiegler, Ran, 2004. "Contracting with Diversely Naive Agents," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4573, C.E.P.R. Discussion Papers.
  13. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
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