Naive analytics: The strategic advantage of algorithmic heuristics

Ron Berman and Yuval Heller

Games and Economic Behavior, 2025, vol. 154, issue C, 62-78

Abstract: We study interactions with uncertainty about demand sensitivity that is estimated by analytics algorithms. In our solution concept (1) firms choose seemingly optimal strategies based on estimates from possibly biased analytics algorithms, and (2) the levels of biases form best replies to one another. In equilibrium the firms' algorithms overestimate advertising effectiveness, as observed empirically, which causes advertisers to overspend. In price competitions firms also underestimate price elasticities and set prices too high. In games with strategic complements (substitutes), profits induced by such “naive analytics” equilibria Pareto dominate (are dominated by) those induced by the Nash equilibrium.

Keywords: Advertising; Pricing; Data analytics; Strategic complements; Delegation (search for similar items in EconPapers)
JEL-codes: C73 D43 M37 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:154:y:2025:i:c:p:62-78

DOI: 10.1016/j.geb.2025.08.009

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