Journal of Economic Literature (JEL) Code(s)
D43, D83, L13
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.
Armstrong, Mark and Zhou, Jidong, "Consumer Information and the Limits to Competition" (2021). Cowles Foundation Discussion Papers. 2595.