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Dynamic competition in deceptive markets
Author(s) -
Johnen Johannes
Publication year - 2020
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12318
Subject(s) - competition (biology) , exploit , business , private information retrieval , industrial organization , homogeneous , value (mathematics) , microeconomics , marketing , economics , computer science , ecology , biology , physics , computer security , machine learning , thermodynamics
In many deceptive markets, firms design contracts to exploit mistakes of naive consumers. These contracts also attract less‐profitable sophisticated consumers. I study such markets when firms compete repeatedly. By observing their customers' usage patterns, firms acquire private information about their level of naiveté. First, I find that private information on naiveté mitigates competition and is of great value even with homogeneous products. Second, competition between initially symmetrically informed firms is mitigated when firms can educate naifs about mistakes. In an analogous setting without naifs, the second result does not occur; the first result occurs when firms cannot disclose fees.