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August 3, 2012
On Price Recognition and Competition with Boundedly Rational Consumers
Posted by D. Daniel Sokol
Vahid Mojtahed, Ca' Foscari University writes On Price Recognition and Competition with Boundedly Rational Consumers.
ABSTRACT: We study an extension of the model of Rubinstein (1993) to two ﬁrms, competing in a market with consumers who are boundedly rational with respect to processing information. The cognitive bound forces customers to partition the price space. Rubinstein shows that a monopolist is able to earn a higher proﬁt by exploiting consumers’ lack of processing ability. We extend his model to a duopoly, and show the Nash and Correlated equilibria of the game. We prove that in competition, whether ﬁrms choose their strategies independently or dependently, ﬁrms’ joint proﬁt is lower than in a monopoly but does not vanish completely. The uncertainty regarding the consumers’ cutoff point and differences across ﬁrms’ prices impel ﬁrms to set their prices equal to the marginal cost.
August 3, 2012 | Permalink
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