Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

A Member of the Law Professor Blogs Network

Friday, 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.

http://lawprofessors.typepad.com/antitrustprof_blog/2012/08/on-price-recognition-and-competition-with-boundedly-rational-consumers.html

| Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341bfae553ef016767f7b630970b

Listed below are links to weblogs that reference On Price Recognition and Competition with Boundedly Rational Consumers:

Comments

Post a comment