The Impact of Boundedly Rational Consumers on the Strategic Decision of Two Competing Firms

Consider two production competing firms offering vertically differentiated products to strategic consumers who are the boundedly rational consumer surplus maximizers. Distinguishing three settings of production capacity commitment, pricing optimization and dynamic production capacity management, we show how consumer behavior resulting from bounded rationality impact pricing and production capacity decisions of firm. In this study, we follow the and model to analyze that consumers strategize over which product to purchase under two scenarios where two firms enter the same market simultaneously or successively. In either model, consumers have to rely on anecdote reasoning or word-of-mouth to infer the product information of both firms. Due to this bounded rationality, firms dynamically adjust their strategic decisions to maximize profits. In this study, we prove that it is not always optimal to the production capacity decisions no matter under one anecdote or multiple anecdotes in either scenario, and the fill rate of regular product increases as the level of product environmental protection increases, then the profit of corresponding firm might increase. We show that the result of production capacity decisions of both firms being not always optimal is robust to the heterogeneous sample size, price optimization and discounted valuation.