Document Type
Discussion Paper
Publication Date
1-18-2021
CFDP Number
2269
CFDP Pages
58
Journal of Economic Literature (JEL) Code(s)
D43, D83, L13
Abstract
This paper studies competition between firms when consumers observe a private signal of their preferences over products. Within the class of signal structures which induce pure-strategy pricing equilibria, we derive signal structures which are optimal for firms and those which 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.
Recommended Citation
Armstrong, Mark and Zhou, Jidong, "Consumer Information and the Limits to Competition" (2021). Cowles Foundation Discussion Papers. 2595.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/2595