A model of price competition and buyer confusion

Warnock, Mark Thomas (2011). A model of price competition and buyer confusion Honours Thesis, School of Economics, The University of Queensland.

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Author Warnock, Mark Thomas
Thesis Title A model of price competition and buyer confusion
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2011
Thesis type Honours Thesis
Supervisor Dr Kenan Kalayci
A/Prof Jeffrey Kline
Total pages 78
Language eng
Subjects 340000 Economics
Formatted abstract

We study the incentives for rational firms to confuse boundedly rational consumers. Our innovation is to introduce a variation of the power law probabilistic choice rule developed by Luce (1959) to model consumer demand. We derive a unique, Nash equilibrium price for firms and show that there is always an incentive for sellers to employ maximal obfuscation strategies. As long as consumers are boundedly rational, an infinite number of sellers can maintain equilibrium prices above marginal cost. This thesis makes a contribution to the behavioural industrial organisation literature as we avoid the common assumption that boundedly rational consumers choose at random.

Keyword Bounded rationality
Buyer confusion
Behavioural Industrial Organisation

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Created: Tue, 28 Feb 2012, 12:31:34 EST by Carmen Mcnaught on behalf of School of Economics