Discussion Paper Details

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Title: Consumer information and the limits to competition

Author(s): Mark Armstrong and Jidong Zhou

Publication Date: December 2019

Keyword(s): Bertrand Competition, information design, Online platforms and product differentiation

Programme Area(s): Industrial Organization

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 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 relaxing competition, while ensuring that consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal structure dampens differentiation, 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 consumers can be designed flexibly.

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Bibliographic Reference

Armstrong, M and Zhou, J. 2019. 'Consumer information and the limits to competition'. London, Centre for Economic Policy Research.