Working Paper: CEPR ID: DP14162
Authors: Mark Armstrong; Jidong Zhou
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.
Keywords: information design; bertrand competition; product differentiation; online platforms
JEL Codes: D43; D47; D83; L13; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm-optimal signal structure (L21) | amplifies product differentiation (L15) |
| amplifies product differentiation (L15) | relaxes competition (L49) |
| relaxes competition (L49) | maximizes total welfare (D69) |
| consumer-optimal structure (D40) | dampens differentiation (L15) |
| dampens differentiation (L15) | intensifies competition (L13) |
| intensifies competition (L13) | leads some consumers to purchase less-preferred products (D11) |
| preference distribution (D39) | affects signal structure (C22) |
| rank signal structure (C20) | yields first-best profits (L21) |