Interaction effects between consumer information and firms' decision rules in a duopoly: how cognitive features can impact market dynamics

Aurélien Nioche*, Basile Garcia, Thomas Boraud, Nicolas Rougier, Sacha Bourgeois-Gironde

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

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Abstract

Duopolies are situations where two independent sellers compete for capturing market share. Such duopolies exist in the world economy (e.g., Boeing/Airbus, Samsung/Apple, Visa/MasterCard) and have been studied extensively in the literature using theoretical models. Among these models, the spatial model of Hotelling (1929) is certainly the most prolific and has generated subsequent literature, each work introducing some variation leading to different conclusions. However, most models assume consumers have unlimited access to information (perfect information hypothesis) and to be rational. Here, we consider a situation where consumers have limited access to information and explore how this factor influences the behavior of competing firms. We first characterized three decision-making processes followed by individual firms (maximizing one's profit, maximizing one's relative profit with respect to the competitor; or tacit collusion) using a simulated model, varying the level of information of consumers. These manipulations alternatively lead the firms to minimally or maximally differentiate their relative position. We then tested the model with human participants in the role of firms and characterized their behavior according to the model. Our results demonstrate that limited access to information by consumers can actually induce a mutually beneficial non-competitive behavior of firms, which is not traceable to explicit collusive strategies. Imperfect information on the part of consumers can hence be exploited by firms through basic and blind decision rules.

Original languageEnglish
Article number33
Number of pages11
JournalPalgrave Communications
Volume5
Issue number1
DOIs
Publication statusPublished - 26 Mar 2019
MoE publication typeA1 Journal article-refereed

Keywords

  • SEQUENTIAL LOCATION
  • COMPETITION
  • STABILITY
  • PRINCIPLE
  • JUDGMENT
  • SEARCH
  • CHOICE
  • GAMES

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