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Economic Theory

, Volume 66, Issue 3, pp 681–705 | Cite as

Price competition with differentiated goods and incomplete product awareness

  • Charlene Cosandier
  • Filomena Garcia
  • Malgorzata Knauff
Research Article

Abstract

We investigate the effects of increased transparency on prices in the Bertrand duopoly model. Market transparency is defined as the proportion of consumers that are fully informed about the market and thus not captive to one firm. We consider two main cases of strategic interaction, prices as strategic complements and as strategic substitutes. For the former class of games, conventional wisdom concerning prices is confirmed, in that they decrease with market transparency. Consumer welfare always increases with higher transparency but changes in firms’ profits are ambiguous. For the latter class of games, an increase in market transparency may lead to an increase in one of the prices, which implies ambiguous effects on both consumer welfare and firms’ profits. An example with linear demand for differentiated products is also investigated. The results of the paper shed light on the mixed evidence concerning the effects of the Internet on retail markets and may illuminate some of the ongoing related public policy debates.

Keywords

Bertrand duopoly Market transparency Consumers awareness Supermodular games Strategic complements/substitutes 

JEL Classification

C72 D43 L13 L15 

Notes

Acknowledgements

The authors are grateful to Rabah Amir for numerous conversations and fruitful suggestions on the topic of this paper. The final version of the paper has also benefited from an anonymous reviewer’s comments. Filomena Garcia acknowledges the financial support from national funds by FCT (Fundação para a Ciência e a Tecnologia). This article is part of the project PTDC/IIM-ECO/4546/2014. The authors also thank conference participants at the 27th International Conference on Game Theory in Stony Brook University and at the VII Workshop on Institutions, Individual Behavior and Economic Outcomes in the University of Sassari.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2017

Authors and Affiliations

  • Charlene Cosandier
    • 1
  • Filomena Garcia
    • 2
  • Malgorzata Knauff
    • 3
  1. 1.Department of EconomicsUniversity of IowaIowa CityUSA
  2. 2.Department of EconomicsIndiana UniversityIndianaUSA
  3. 3.Department of Quantitative EconomicsWarsaw School of EconomicsWarsawPoland

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