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Naive Analytics Equilibrium

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  • Berman, Ron
  • Heller, Yuval

Abstract

We study interactions with uncertainty about demand sensitivity. In our solution concept (1) firms choose seemingly-optimal strategies given the level of sophistication of their data analytics, and (2) the levels of sophistication form best responses to one another. Under the ensuing equilibrium firms underestimate price elasticities and overestimate advertising effectiveness, as observed empirically. The misestimates cause firms to set prices too high and to over-advertise. In games with strategic complements (substitutes), profits Pareto dominate (are dominated by) those of the Nash equilibrium. Applying the model to team production games explains the prevalence of overconfidence among entrepreneurs and salespeople.

Suggested Citation

  • Berman, Ron & Heller, Yuval, 2020. "Naive Analytics Equilibrium," MPRA Paper 103824, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:103824
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    More about this item

    Keywords

    Advertising; pricing; data analytics; strategic distortion; strategic complements; indirect evolutionary approach.;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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