Sampling-Based Reasoning I: Price Competition and Product Differentiation

Spiegler Ran

in Bounded Rationality and Industrial Organization

Published in print February 2011 | ISBN: 9780195398717
Published online September 2011 | e-ISBN: 9780199896790 | DOI:
Sampling-Based Reasoning I: Price Competition and Product Differentiation

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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

Chapter.  7947 words. 

Subjects: Economics

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