Discussion paper

DP14162 Consumer information and the limits to competition

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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Citation

Armstrong, M and J Zhou (eds) (2019), “DP14162 Consumer information and the limits to competition”, CEPR Press Discussion Paper No. 14162. https://cepr.org/publications/dp14162