CFDP 2269
Consumer Information and the Limits to Competition
Author(s):Publication Date: January 2021
Pages: 58
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.
Keywords: Information design, Bertrand competition, Product differentiation, Online platforms
JEL Classification Codes: D43, D83, L13
JEL Classification Codes: D43D83L13
d2269.pdf