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Competition over agents with boundedly rational expectations

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    (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.

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  • ,, 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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    More about this item

    Keywords

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

    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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