Consumer Information and the Limits to Competition
American Economic Review · 2022 · Volume 112 · Issue 2
Abstract
This paper studies competition between firms when consumers observe a private signal of their preferences over products. Within the class of signal structures that induce pure-strategy pricing equilibria, we derive signal structures that are optimal for firms and those that are optimal for consumers. The firm-optimal policy amplifies underlying product differentiation, thereby relaxing competition, while ensuring consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal policy dampens differentiation, which intensifies competition, but induces some consumers to buy their less preferred product. Our analysis sheds light on the limits to competition when the information possessed by consumers can be designed flexibly.
Keywords
Consumer Economics: Theory, Firm Behavior: Theory, Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, Asymmetric and Private Information, Mechanism Design, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Oligopoly and Other Imperfect Markets
Enable JavaScript for citation tools and additional paper interactions.