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Bounded Rationality and Industrial Organization$
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Ran Spiegler

Print publication date: 2011

Print ISBN-13: 9780195398717

Published to Oxford Scholarship Online: September 2011

DOI: 10.1093/acprof:oso/9780195398717.001.0001

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Sampling-Based Reasoning I: Price Competition and Product Differentiation

Sampling-Based Reasoning I: Price Competition and Product Differentiation

(p.77) 6 Sampling-Based Reasoning I: Price Competition and Product Differentiation
Bounded Rationality and Industrial Organization

Spiegler Ran

Oxford University Press

This chapter introduces a model of sampling-based reasoning and examined price competition, technology adoption and product differentiation when consumers behave according to this model. It is shown that a market for a product of no intrinsic value (a “market for quacks”) can thrive thanks to the inference errors that result from consumers’ anecdotal reasoning. Equilibrium is characterized by price dispersion. Stronger competition need not curb market exploitation of consumers, partly because firms employ product complexity as a spurious product differentiation device. Finally, competitive markets need not provide firms with incentives to “educate” boundedly rational consumers.

Keywords:   sampling, sampling-based reasoning, anecdotal reasoning, price competition, technology adoption, product differentiation, spurious product differentiation, market for quacks, inference errors, product complexity, price dispersion, educating consumers

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