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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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    References listed on IDEAS

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    JEL classification:

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

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