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A Simple Model of Bertrand Duopoly with Noisy Prices

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  • Kaminski, Bogumil
  • Latek, Maciej

Abstract

We examine a market in which consumers are forced to rely on noisy price signals to select between homogeneous products. The noise originates either from firms' price obfuscation or consumers' bounded information processing capabilities. Standard models and empirical experiments of markets with noise or price obfuscation show that it leads to higher prices detrimental to consumers' welfare. This paper identifies conditions under which an opposite result can be expected. In particular, it shows that a moderate level of noise is beneficial to consumers in a market with a cost leader.

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File URL: http://mpra.ub.uni-muenchen.de/41333/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41333.

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Date of creation: 14 Sep 2012
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Handle: RePEc:pra:mprapa:41333

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Keywords: noisy pricing; bounded rationality; Bertrand oligopoly; game theory;

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  1. Glenn Ellison & Alexander Wolitzky, 2009. "A Search Cost Model of Obfuscation," NBER Working Papers 15237, National Bureau of Economic Research, Inc.
  2. Ran Spiegler, 2005. "Competition over Agents with Boundedly Rational Expectations," Levine's Bibliography 122247000000000535, UCLA Department of Economics.
  3. Michael Thompson & Steve Thompson, 2006. "Pricing in a market without apparent horizontal differentiation: Evidence from web hosting services," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 15(7), pages 649-663.
  4. Rubenstein, A., 1991. "On Price Recognition and Computational Complexity in a Monopolistic Model," Papers 35-91, Tel Aviv.
  5. Luke Garrod, 2008. "Price Transparency and Consumer Naivety in a Competitive Market," Working Papers 07-10, Centre for Competition Policy, University of East Anglia.
  6. David Laibson & Xavier Gabaix, 2004. "Competition and Consumer Confusion," Econometric Society 2004 North American Summer Meetings 663, Econometric Society.
  7. Anderson, Simon P & de Palma, André, 2004. "Price Dispersion and Consumer Reservation Prices," CEPR Discussion Papers 4618, C.E.P.R. Discussion Papers.
  8. KalaycI, Kenan & Potters, Jan, 2011. "Buyer confusion and market prices," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 14-22, January.
  9. Spector David, 2002. "The Noisy Duopolist," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-19, August.
  10. Eric K. Clemons & Il-Horn Hann & Lorin M. Hitt, 2002. "Price Dispersion and Differentiation in Online Travel: An Empirical Investigation," Management Science, INFORMS, vol. 48(4), pages 534-549, April.
  11. Perloff, Jeffrey M & Salop, Steven C, 1985. "Equilibrium with Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 107-20, January.
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