Bertrand Oligopoly with Boundedly Rational Consumers

摘要

In this paper we consider a model of Bertrand oligopoly when consumersrnare boundedly rational and make their purchase decisions probabilistically,rnaccording to the Luce model. We consider three different cases: first, werncharacterize equilibrium when firms face boundedly rational consumers with thernfixed irrationality parameter λ; second, we discuss the case of obfuscatingrnoligopoly, when firms can invest in order to confuse consumers, i.e. to increaserntheir λ; and third, we consider educating oligopoly, when firms can choose torninvest to decrease λ. We show that while it is worthwhile for the firms to confusernthe consumers, it is only optimal to educate them if they are sufficiently rationalrnat default. We also analyze how the social welfare, consumer surplus and thernfirms’ profits depend on the number of firms.