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Competition over agents with boundedly rational expectations

  • Spiegler, Ran

    ()

    (Tel Aviv University)

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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File URL: http://econtheory.org/ojs/index.php/te/article/viewFile/20060207/612/21
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Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): 1 (2006)
Issue (Month): 2 (June)
Pages: 207-231

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Handle: RePEc:the:publsh:144
Contact details of provider: Web page: http://econtheory.org

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  1. Martin J. Osborne & Ariel Rubinstein, 1997. "Games with Procedurally Rational Players," Department of Economics Working Papers 1997-02, McMaster University.
  2. Michele Piccione & Ariel Rubinstein, 2003. "Modeling the Economic Interaction of Agents With Diverse Abilities to Recognize Equilibrium Patterns," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 212-223, 03.
  3. 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.
  4. Ran Spiegler, 2006. "The Market for Quacks," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1113-1131.
  5. Matthew Rabin., 2000. "Inference by Believers in the Law of Small Numbers," Economics Working Papers E00-282, University of California at Berkeley.
  6. Kfir Eliaz & Ran Spiegler, 2006. "Contracting with Diversely Naive Agents," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 689-714.
  7. Rubenstein, A., 1991. "On Price Recognition and Computational Complexity in a Monopolistic Model," Papers 35-91, Tel Aviv.
  8. 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.
  9. 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.
  10. Malmendier, Ulrike M. & Della Vigna, Stefano, 2003. "Contract Design and Self Control: Theory and Evidence," Research Papers 1801, Stanford University, Graduate School of Business.
  11. Wilson, Charles A, 1988. "On the Optimal Pricing Policy of a Monopolist," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 164-76, February.
  12. Salop, Steven, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 393-406, October.
  13. Glenn Ellison & Sara Fisher Ellison, 2009. "Search, Obfuscation, and Price Elasticities on the Internet," Econometrica, Econometric Society, vol. 77(2), pages 427-452, 03.
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