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

  • Lin, C.-Y. Cynthia

    (U of Californai, Davis)

  • Muelegger, Erich

    (Harvard U)

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.

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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp07-025.

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Date of creation: May 2007
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Handle: RePEc:ecl:harjfk:rwp07-025
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  1. Ellison, Glenn & Fudenberg, Drew, 1993. "Rules of Thumb for Social Learning," Scholarly Articles 3196332, Harvard University Department of Economics.
  2. Gal-Or, Esther, 1986. "Information Transmission-Cournot and Bertrand Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 85-92, January.
  3. Shapiro, Carl, 1986. "Exchange of Cost Information in Oligopoly," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 433-46, July.
  4. 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 229-57, February.
  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. 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.
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