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A Simple Model of Bertrand Duopoly with Noisy Prices

By  |  November 1, 2012

Posted by D. Daniel Sokol

Bogumil Kaminski (Trier) and Maciej Latek (George Mason) offer A Simple Model of Bertrand Duopoly with Noisy Prices

ABSTRACT: We examine a market in which consumers are forced to rely on noisy price signals to select between homogeneous products. The noise originates either from firms’ price obfuscation or consumers’ bounded information processing capabilities. Standard models and empirical experiments of markets with noise or price obfuscation show that it leads to higher prices detrimental to consumers’ welfare. This paper identifies conditions under which an opposite result can be expected. In particular, it shows that a moderate level of noise is beneficial to consumers in a market with a cost leader.