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Competition over agents with boundedly rational expectations

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  • Spiegler, Ran

    () (Tel Aviv University)

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.

Suggested Citation

  • Spiegler, Ran, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 1(2), pages 207-231, June.
  • Handle: RePEc:the:publsh:144
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    References listed on IDEAS

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    1. Roger B. Myerson, 1992. "Incentives to Cultivate Favored Minorities under Alternative Electoral Systems," Discussion Papers 1000, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    6. Rubinstein, Ariel, 1993. "On Price Recognition and Computational Complexity in a Monopolistic Model," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 473-484, June.
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    8. Gilboa,Itzhak & Schmeidler,David, 2001. "A Theory of Case-Based Decisions," Cambridge Books, Cambridge University Press, number 9780521802345, December.
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    14. repec:cup:apsrev:v:87:y:1993:i:04:p:856-869_10 is not listed on IDEAS
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    More about this item

    Keywords

    Bounded rationality; industrial organization; multi-dimensional pricing; law of small numbers; market exploitation; obfuscation;

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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