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

PDF: 
PDF icon d2269.pdf