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Using Approximations to Competitors’ Private Information: An Application of Cognitive Costs to Strategic Behavior

Author

Listed:
  • Lin, C.-Y. Cynthia

    (U of Californai, Davis)

  • Muelegger, Erich

    (Harvard U)

Abstract

Owing to cognitive costs, firms may choose strategies using a heuristic based on the expectation of their opponents’ private information rather than using the full information about the distribution of that private information. We find that the degree to which the heuristic and the Bayesian, or "full-information", strategies adopted in equilibrium differ depends on convexity and strategic complementarity or substitutability. Under certain conditions, firms’ equilibrium profits are greater when all firms use heuristics than when all firms use the full information. Our results provide insight into incentives firms may have to either facilitate or impede access to industry information.

Suggested Citation

  • Lin, C.-Y. Cynthia & Muelegger, Erich, 2007. "Using Approximations to Competitors’ Private Information: An Application of Cognitive Costs to Strategic Behavior," Working Paper Series rwp07-025, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp07-025
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    File URL: https://research.hks.harvard.edu/publications/workingpapers/citation.aspx?PubId=4862&type=WPN
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    References listed on IDEAS

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    1. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, Oxford University Press, vol. 69(1), pages 99-118.
    2. Kelly Shue & Erzo F. P. Luttmer, 2009. "Who Misvotes? The Effect of Differential Cognition Costs on Election Outcomes," American Economic Journal: Economic Policy, American Economic Association, vol. 1(1), pages 229-257, February.
    3. Esther Gal-or, 1986. "Information Transmission—Cournot and Bertrand Equilibria," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 85-92.
    4. Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2006. "Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model," American Economic Review, American Economic Association, vol. 96(4), pages 1043-1068, September.
    5. Esther Gal-Or, 1988. "The Advantages of Imprecise Information," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 266-275, Summer.
    6. Ellison, Glenn & Fudenberg, Drew, 1993. "Rules of Thumb for Social Learning," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 612-643, August.
    7. Carl Shapiro, 1986. "Exchange of Cost Information in Oligopoly," Review of Economic Studies, Oxford University Press, vol. 53(3), pages 433-446.
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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