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Naive analytics: The strategic advantage of algorithmic heuristics

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  • Berman, Ron
  • Heller, Yuval

Abstract

We study interactions with uncertainty about demand sensitivity that is estimated by analytics algorithms. In our solution concept (1) firms choose seemingly optimal strategies based on estimates from possibly biased analytics algorithms, and (2) the levels of biases form best replies to one another. In equilibrium the firms' algorithms overestimate advertising effectiveness, as observed empirically, which causes advertisers to overspend. In price competitions firms also underestimate price elasticities and set prices too high. In games with strategic complements (substitutes), profits induced by such “naive analytics” equilibria Pareto dominate (are dominated by) those induced by the Nash equilibrium.

Suggested Citation

  • Berman, Ron & Heller, Yuval, 2025. "Naive analytics: The strategic advantage of algorithmic heuristics," Games and Economic Behavior, Elsevier, vol. 154(C), pages 62-78.
    • Handle: RePEc:eee:gamebe:v:154:y:2025:i:c:p:62-78
    DOI: 10.1016/j.geb.2025.08.009
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    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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