Naive Analytics Equilibrium

Ron Berman and Yuval Heller

MPRA Paper from University Library of Munich, Germany

Abstract: We study interactions with uncertainty about demand sensitivity. In our solution concept (1) firms choose seemingly-optimal strategies given the level of sophistication of their data analytics, and (2) the levels of sophistication form best responses to one another. Under the ensuing equilibrium firms underestimate price elasticities and overestimate advertising effectiveness, as observed empirically. The misestimates cause firms to set prices too high and to over-advertise. In games with strategic complements (substitutes), profits Pareto dominate (are dominated by) those of the Nash equilibrium. Applying the model to team production games explains the prevalence of overconfidence among entrepreneurs and salespeople.

Keywords: Advertising; pricing; data analytics; strategic distortion; strategic complements; indirect evolutionary approach. (search for similar items in EconPapers)
JEL-codes: C73 D43 M37 (search for similar items in EconPapers)
Date: 2020-10-28
New Economics Papers: this item is included in nep-com, nep-ent, nep-gth and nep-ore
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/106897/1/MPRA_paper_106897.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/106897/2/MPRA_paper_106897.pdf revised version (application/pdf)

Related works:
Working Paper: Naive analytics equilibrium (2021)
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