Price and Quality Competition with Boundedly Rational Consumers∗
نویسنده
چکیده
We consider a market model with n rational firms (doctors) and a continuum of boundedly rational consumers (patients). Following Spiegler (2006a), we assume that patients are not familiar with the market and rely on anecdotes. We analyze the price setting game played by doctors with given, different healing qualities. Doctors know their own quality, as well as the qualities of their competitors. We find a unique equilibrium in mixed strategies. All doctors, no matter how bad, make positive profits that are typically considerably higher than their maxmin payoffs. In order to analyze welfare, we introduce a pre-stage where doctors choose qualities. Even though a better quality comes for free, doctors mainly offer mediocre qualities in all SPNE. If the highest possible quality is high enough, welfare strictly decreases in the number of doctors. JEL Classification: L13, L15, D44
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