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Competition over agents with boundedly rational expectations

Spiegler, R; (2006) Competition over agents with boundedly rational expectations. Theoretical Economics , 1 (2) 207 -231. Green open access

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Abstract

I study a market model in which profit-maximizing firms compete in multi-dimensional pricing strategies over a consumer, who is limited in his ability to grasp such complicated objects and therefore uses a sampling procedure to evaluate them. Firms respond to increased competition with an increased effort to obfuscate, rather than with more competitive pricing. As a result, consumer welfare is not enhanced and may even deteriorate. Specifically, when firms control both the price and the quality of each dimension, and there are diminishing returns to quality, increased competition implies an efficiency loss which is entirely borne by consumers.

Type: Article
Title: Competition over agents with boundedly rational expectations
Open access status: An open access version is available from UCL Discovery
Publisher version: http://econtheory.org/
Language: English
Additional information: This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by-nc/3.0/), which permits use, distribution, and reproduction in any medium, provided that that reuse is restricted to non-commercial purposes, i.e. research or educational use, and provided that the original work is properly cited.
Keywords: Bounded rationality, Industrial organization, Multi-dimensional pricing, Law of small numbers, Market exploitation, Obfuscation
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/41667
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