Luppi, Barbara
(2006)
Price Competition over Boundedly Rational Agents.
Bologna:
Dipartimento di Scienze economiche DSE,
p. 24.
DOI
10.6092/unibo/amsacta/4722.
In: Quaderni - Working Paper DSE
(565).
ISSN 2282-6483.
Full text available as:
Abstract
We develop a model to study market interaction between rational
firms on one side of the market and boundedly rational consumers on
the other. A special feature of bounded rationality is modelled here:
from psychological evidence, people tend to group events or numbers
into categories; therefore we consider consumers who partition the
price space into connected sets and regard each price belonging to the
same set as equal.
According to Rubinstein (1993), we endogenize the choice of the
price partition by consumers, who determine the optimal price partition
given the constraint imposed on their ability to process information
on prices. We develop a model with two firms and two states of
nature. We show that we depart from classical Bertrand result when
consumers are characterized by a bound on the finiteness of price partition
inferior to the cardinality of the space of world states. In other
words, in presence of consumers who can partition the price space into
two sets and with two states of the world, firms find optimal to set
price above marginal cost, making positive profits. The intuition of
the result can be explained as follows: when a consumer chooses the
price partition, she faces a trade off between the detection of the state
of nature and the detection of a deviating behavior of the firm in a
given state of nature.
Abstract
We develop a model to study market interaction between rational
firms on one side of the market and boundedly rational consumers on
the other. A special feature of bounded rationality is modelled here:
from psychological evidence, people tend to group events or numbers
into categories; therefore we consider consumers who partition the
price space into connected sets and regard each price belonging to the
same set as equal.
According to Rubinstein (1993), we endogenize the choice of the
price partition by consumers, who determine the optimal price partition
given the constraint imposed on their ability to process information
on prices. We develop a model with two firms and two states of
nature. We show that we depart from classical Bertrand result when
consumers are characterized by a bound on the finiteness of price partition
inferior to the cardinality of the space of world states. In other
words, in presence of consumers who can partition the price space into
two sets and with two states of the world, firms find optimal to set
price above marginal cost, making positive profits. The intuition of
the result can be explained as follows: when a consumer chooses the
price partition, she faces a trade off between the detection of the state
of nature and the detection of a deviating behavior of the firm in a
given state of nature.
Document type
Monograph
(Working Paper)
Creators
Keywords
bounded rationality, Bertrand competition
Subjects
ISSN
2282-6483
DOI
Deposit date
29 Feb 2016 11:14
Last modified
29 Feb 2016 11:14
URI
Other metadata
Document type
Monograph
(Working Paper)
Creators
Keywords
bounded rationality, Bertrand competition
Subjects
ISSN
2282-6483
DOI
Deposit date
29 Feb 2016 11:14
Last modified
29 Feb 2016 11:14
URI
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