On the use of heuristics to approximate competitors’ private information

C.-Y. Cynthia Lin Lawell and Erich Muehlegger

Journal of Economic Behavior & Organization, 2013, vol. 86, issue C, 10-23

Abstract: Firms often lack knowledge of the nature of the uncertainty they or their opponents face and use heuristics or approximations to determine their strategy. We define and analyze one type of “heuristic strategy”, in which firms choose strategies based on the expectation of their opponents’ private information rather than the full information about the distribution of that private information. We find that, in equilibrium, the degree to which the heuristic strategy differs from the Bayesian strategy depends on: (1) the convexity of a firm's marginal profits with respect to their opponents’ private information and (2) whether firm strategies are complementary or substitutable. Under certain conditions, firms’ equilibrium profits are greater when all firms use heuristics than when all firms use the full information. Our results provide insight into incentives firms may have to either facilitate or impede access to industry information.

Keywords: Firm behavior; Heuristics; Strategic complements; Strategic substitutes; Bounded rationality; Asymmetric information; Cognitive costs; Information provision (search for similar items in EconPapers)
JEL-codes: D21 D80 L10 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268113000024
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:86:y:2013:i:c:p:10-23

DOI: 10.1016/j.jebo.2013.01.001

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().