American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Consumer Information and the Limits to Competition
American Economic Review
vol. 112,
no. 2, February 2022
(pp. 534–77)
Abstract
This paper studies competition between firms when consumers observe a private signal of their preferences over products. Within the class of signal structures that induce pure-strategy pricing equilibria, we derive signal structures that are optimal for firms and those that 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.Citation
Armstrong, Mark, and Jidong Zhou. 2022. "Consumer Information and the Limits to Competition." American Economic Review, 112 (2): 534–77. DOI: 10.1257/aer.20210083Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D21 Firm Behavior: Theory
- D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- L13 Oligopoly and Other Imperfect Markets