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Consumer Information and the Limits to Competition

Mark Armstrong () and Jidong Zhou

No 888, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper studies competition between firms when consumers observe a pri-vate signal of their preferences over products. Within the class of signal structures which allow pure-strategy pricing equilibria, we derive signal structures which are optimal for firms and those which are optimal for consumers. The firm-optimal signal structure amplifies the underlying product differentiation, thereby relax¬ing competition, while ensuring that consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal structure dampens dif¬ferentiation, which intensifies competition, but induces some consumers with weak preferences between products to buy their less-preferred product. The analysis sheds light on the limits to competition when the information possessed by con¬sumers can be designed flexibly.

Keywords: Information design; Bertrand competition; product differentiation; online platforms (search for similar items in EconPapers)
JEL-codes: D43 D47 D83 L13 L15 (search for similar items in EconPapers)
Date: 2019-11-28
New Economics Papers: this item is included in nep-com, nep-ind and nep-ore
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