On Price Recognition and Computational Complexity in a Monopolistic Model

The paper introduces a simple economic model in which the decision makers differ in their ability to recognize price offers. The cornerstone of the model is a market for an indivisible good produced by a monopolist who receives exclusive information on the state of nature affecting the production costs and the consumers' evaluation of the good. The market operates so that the monopolist has to commit himself to a price and each consumer has to decide whether he accepts or rejects the offer. The monopolist has an interest in only a fraction of the consumers accepting the offer. The heterogeneity of the consumers is modelled first, in terms of the limits on the fineness of the price recognition and second, in terms of the limits on the complexity of the computations they can make. In the second submodel, tools are borrowed from the parallel computation literature. In equilibrium, the monopolist announces a price scheme which is sufficiently complicated that only some of the consumers (the more "sophisticated" ones) can decode all the information contained in the prices. Such pricing strategies enable the monopolist to increase his profits relative to those he could derive from a set of homogeneous consumers.

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Working or Discussion Paper
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Working Paper No. 35-91

 Record created 2018-07-31, last modified 2020-10-28

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