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Consumer information and the limits to competition

Author

Listed:
  • Armstrong, Mark
  • Zhou, Jidong

Abstract

This paper studies competition between firms when consumers observe a private signal of their preferences over products. Within the class of signal structures which allow pure-strategy pricing equilibria, we derive signal structures which are optimal for firms and those which are optimal for consumers. The firm-optimal signal structure amplifies the underlying product differentiation, thereby relaxing competition, while ensuring that consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal structure dampens differentiation, which intensifies competition, but induces some consumers with weak preferences between products to buy their less-preferred product. The analysis sheds light on the limits to competition when the information possessed by consumers can be designed flexibly.

Suggested Citation

  • Armstrong, Mark & Zhou, Jidong, 2019. "Consumer information and the limits to competition," MPRA Paper 97123, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:97123
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    File URL: https://mpra.ub.uni-muenchen.de/97123/1/MPRA_paper_97123.pdf
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    More about this item

    Keywords

    Information design; Bertrand competition; product differentiation; online platforms;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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