Publication Date: January 2021
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