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Faculty Research Working Paper Series
Erich J. Muehlegger
Associate Professor of Public Policy
Using Approximations to Competitors’ Private Information: An Application of Cognitive Costs to Strategic Behavior.
Lin, C.-Y. Cynthia, and Erich J. Muehlegger,. ""Using Approximations to Competitors’ Private Information: An Application of Cognitive Costs to Strategic Behavior."." KSG Faculty Research Working Paper Series RWP07-025, May 2007.
Abstract
Owing to cognitive costs, firms may choose strategies using a heuristic based on the expectation of their opponents’ private information rather than using the full information about the distribution of that private information. We find that the degree to which the heuristic and the Bayesian, or "full-information", strategies adopted in equilibrium differ depends on convexity and strategic complementarity or substitutability. Under certain conditions, firms’ equilibrium profits are greater when all firms use heuristics than when all firms use the full information. Our results provide insight into incentives firms may have to either facilitate or impede access to industry information.
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